INTEGRITY IS WHAT YOU DO WHEN NO ONE IS WATCHING
I was happy to see Michael Josephson's commentary today, where he reconsidered his previous support of Penn State's Joe Paterno. Yes, Paterno is a legend, and built a reputation of honesty, integrity, and character by molding young football players into men for decades. However, when no one was looking, Paterno failed the ultimate test. When faced with the choice of doing the right thing or taking a "half-measure" that he knew posed the lowest risk to himself and his beloved football program, he chose the most convenient (and despicable) path. Paterno had to know that reporting a child molestation in the Penn State locker room to the Athletic Director would not result in full transparency, an investigation, police involvement, or justice for the molester. Rather, Paterno knew that the matter would be handled "quietly", if at all, protecting the reputation of the team (and the coaches). The NCAA has been struggling with the weak, often non-existent ethical cultures of college athletic departments for years. Violation after violation has revealed that the nation's colleges and universities don't want to "kill the golden calf" , the money machine generated by their football programs. Colleges and their athletic departments have frequently turned a blind eye to even the most egregious NCAA recruiting violations until a fed-up whistleblower goes to the press.
What this entire Penn State mess illustrates is that ignoring the ethical culture of an organization has consequences for everyone involved. Colleges and universities need to establish strong ethics and compliance programs, reporting directly to the Board of Trustees that oversee every aspect of university life. Yes, even the Athletic Department. If there had been an anonymous hotline; a meaningful, and enforced code of conduct that required reporting of violations; regular ethics training sessions as a reminder of the obligations of every employee, faculty member, and coach; and a tone at the top of each department, from the Chairman of the Board of Trustees, to the University President, to the Director of Athletics, perhaps the despicable behavior of this one man that destroyed the lives of these children could have been stopped sooner.
Paterno should have confronted his former Assistant coach, stopped this crime, and called the police. That's what a person of character would have done. Integrity is what you do and how you act when no one is watching. Paterno failed the test. Decades of football championships and college kids overturning cars in defense of their "Joe-Pa" won't change this basic fact. This is Paterno's new legacy. Perhaps it will serve as a teaching moment for colleges and universities throughout the country.
COMMENTARY: Sorry, Joe, You Have to Go
Friday, November 11, 2011
Friday, October 21, 2011
" Occupy Wall Street:" A Protest Against Fraud?
" Occupy Wall Street:" A Protest Against Fraud?
There has been much discussion about the reasons behind the growing movement originally labeled "Occupy Wall Street". Is this merely a situational reaction to the current economic crisis and its resulting high employment, or does it go much deeper into the ever widening class divisions in this country? The author of the attached article correctly presents another view: that the 'Occupy" movements, now spreading around the world might be motivated, in part, by the seemingly endless string of unethical corporate behavior that has contributed greatly to our economic problems. From the accounting scandals of Enron, Tyco, Worldcom, and Adelphia that happened almost a decade ago, to the stunningly bad decisions made by companies like AIG, Standard and Poors, Merill Lynch, Countrywide and others that led to our economic meltdown in 2008, the absence of ethical behavior in corporate America is finally stimulating a reaction across the country. While it is still unclear exactly what the movement is asking for, the common thread of terms used by hundreds of protestors interviewed involves words like "accountability", "transparency", "equity", "ethics", and "morality". Finally, it seems that Americans are viewing corporate ethics and compliance as more than some arcane requirement contained in the Federal Sentencing Guidelines. Hopefully, as the movement's leadership, goals, objectives, and strategies are better defined, the principles of corporate ethics, compliance, and accountability will emerge as concrete areas in which our government, and our society, can better focus its attention.
There has been much discussion about the reasons behind the growing movement originally labeled "Occupy Wall Street". Is this merely a situational reaction to the current economic crisis and its resulting high employment, or does it go much deeper into the ever widening class divisions in this country? The author of the attached article correctly presents another view: that the 'Occupy" movements, now spreading around the world might be motivated, in part, by the seemingly endless string of unethical corporate behavior that has contributed greatly to our economic problems. From the accounting scandals of Enron, Tyco, Worldcom, and Adelphia that happened almost a decade ago, to the stunningly bad decisions made by companies like AIG, Standard and Poors, Merill Lynch, Countrywide and others that led to our economic meltdown in 2008, the absence of ethical behavior in corporate America is finally stimulating a reaction across the country. While it is still unclear exactly what the movement is asking for, the common thread of terms used by hundreds of protestors interviewed involves words like "accountability", "transparency", "equity", "ethics", and "morality". Finally, it seems that Americans are viewing corporate ethics and compliance as more than some arcane requirement contained in the Federal Sentencing Guidelines. Hopefully, as the movement's leadership, goals, objectives, and strategies are better defined, the principles of corporate ethics, compliance, and accountability will emerge as concrete areas in which our government, and our society, can better focus its attention.
Wednesday, September 28, 2011
Mistakes Companies Make
Check out my article, "The Seven Biggest Mistakes Companies Make that Erode Ethical Culture and Destroy Reputation", published in the October 2011 Compliance and Ethics Professional, the journal of the Society of Corporate Compliance and Ethics (SCCE).
https://docs.google.com/viewer?a=v&pid=explorer&chrome=true&srcid=0B3TNvz45emS5NTdlM2ZkZjYtNmVmZC00YTJlLWJjNjEtOTRlZDI5NmY0Nzkz&hl=en_US
https://docs.google.com/viewer?a=v&pid=explorer&chrome=true&srcid=0B3TNvz45emS5NTdlM2ZkZjYtNmVmZC00YTJlLWJjNjEtOTRlZDI5NmY0Nzkz&hl=en_US
Wednesday, September 14, 2011
Los Angeles Area Schools, Teachers Accused Of Cheating
Los Angeles Area Schools, Teachers Accused Of Cheating
I knew it wouldn't be long before the Atlanta school cheating scandal made its way across the country. What we have here is a classic case of teachers and school administrators "rationalizing" their ethical lapses as some kind of legitimate protest against standardized testing. These educators, who serve as models and mentors to the nation's youth, provided answers to standardized tests to the students in advance; changed test answers after the test; and falsified test results in order to make their schools appear to be more successful in educating the children. Although there are certainly legitimate arguments to be made questioning the value of these tests as an indicator of learning, cheating is obviously not the answer. The example these teachers have set for an already ethically-challenged generation of youth has done far more damage than anything the testing process could have accomplished. As the kids see it, this "ends justify the means" approach to life is merely an extension of what they have been seeing in the business world every day. Horrible ethical decisionmaking by dozens of companies in the finance, banking and mortgage industries brought the economy to its knees in 2008, and we have yet to recover. The consequences for many of these companies: record level profits and executive compensation.
There have been tremendous strides within many industries in improving ethical culture and decisionmaking, strengthening ethics and compliance programs, and focusing on integrity as an integral part of doing business. Increased attention by government regulators and law enforcement in areas such as the Foreign Corrupt Practices Act, the Dodd-Frank Wall Street Financial Reform, and Ethics and Compliance provisions of the federal acquisition regulations are beginning to set the right tone and example. Its time we place greater attention on the ethical values of our future employees -- the students.
I knew it wouldn't be long before the Atlanta school cheating scandal made its way across the country. What we have here is a classic case of teachers and school administrators "rationalizing" their ethical lapses as some kind of legitimate protest against standardized testing. These educators, who serve as models and mentors to the nation's youth, provided answers to standardized tests to the students in advance; changed test answers after the test; and falsified test results in order to make their schools appear to be more successful in educating the children. Although there are certainly legitimate arguments to be made questioning the value of these tests as an indicator of learning, cheating is obviously not the answer. The example these teachers have set for an already ethically-challenged generation of youth has done far more damage than anything the testing process could have accomplished. As the kids see it, this "ends justify the means" approach to life is merely an extension of what they have been seeing in the business world every day. Horrible ethical decisionmaking by dozens of companies in the finance, banking and mortgage industries brought the economy to its knees in 2008, and we have yet to recover. The consequences for many of these companies: record level profits and executive compensation.
There have been tremendous strides within many industries in improving ethical culture and decisionmaking, strengthening ethics and compliance programs, and focusing on integrity as an integral part of doing business. Increased attention by government regulators and law enforcement in areas such as the Foreign Corrupt Practices Act, the Dodd-Frank Wall Street Financial Reform, and Ethics and Compliance provisions of the federal acquisition regulations are beginning to set the right tone and example. Its time we place greater attention on the ethical values of our future employees -- the students.
Wednesday, August 17, 2011
FBI: Mortgage fraud still prevalent, hard to catch - USATODAY.com
FBI: Mortgage fraud still prevalent, hard to catch - USATODAY.com
With all of the public attention paid to the complex web of failures that led to the mortgage crisis and resulting economic meltdown, you would think that the mortgage biz would now be squeeky clean. If you've tried to get a home loan or refinanced your house lately, you've probably seen a tightening in the eligibility rules; stricter documentation requirements; and a significant "raising of the bar" in underwriting standards. Gone are the days of "no-doc" loans, 125% financing, and mortgages handed out like candy without regard to ability to pay them back, right?
According to the news article above from USA Today, fraud is still running rampant in the mortgage industry. How can this be? The FBI's annual report on mortgage fraud said such schemes are particularly resilient and hard to discover, and their total cost is unknown. Real estate firm CoreLogic says more than $10 billion in loans were made with fraudulent application data in 2010, the report noted. In spite of all of the additional public attention and oversight, fraud last year stayed at levels seen in 2009 as the housing market remained in distress, providing ample opportunity for schemes, the FBI report said. It predicted that perpetrators would "continue to seek new methods to circumvent loopholes and gaps in the mortgage lending market."
The most prevalent schemes involve falsifying financial information to qualify buyers who otherwise would be ineligible for a loan. Other crimes involve inflated appraisals, including schemes that use dishonest appraisals to sell homes at elevated prices. Some get-rich-quick schemes persuade investors to buy rental property or land believing the price will appreciate quickly. The FBI report indicates that the crimes are committed by licensed and unlicensed brokers, loan officers, real estate agents, appraisers and other industry insiders who use their expertise to exploit vulnerabilities in the system. Organized crime groups are also behind some of the fraud, the report said.
With all of the public attention paid to the complex web of failures that led to the mortgage crisis and resulting economic meltdown, you would think that the mortgage biz would now be squeeky clean. If you've tried to get a home loan or refinanced your house lately, you've probably seen a tightening in the eligibility rules; stricter documentation requirements; and a significant "raising of the bar" in underwriting standards. Gone are the days of "no-doc" loans, 125% financing, and mortgages handed out like candy without regard to ability to pay them back, right?
According to the news article above from USA Today, fraud is still running rampant in the mortgage industry. How can this be? The FBI's annual report on mortgage fraud said such schemes are particularly resilient and hard to discover, and their total cost is unknown. Real estate firm CoreLogic says more than $10 billion in loans were made with fraudulent application data in 2010, the report noted. In spite of all of the additional public attention and oversight, fraud last year stayed at levels seen in 2009 as the housing market remained in distress, providing ample opportunity for schemes, the FBI report said. It predicted that perpetrators would "continue to seek new methods to circumvent loopholes and gaps in the mortgage lending market."
The most prevalent schemes involve falsifying financial information to qualify buyers who otherwise would be ineligible for a loan. Other crimes involve inflated appraisals, including schemes that use dishonest appraisals to sell homes at elevated prices. Some get-rich-quick schemes persuade investors to buy rental property or land believing the price will appreciate quickly. The FBI report indicates that the crimes are committed by licensed and unlicensed brokers, loan officers, real estate agents, appraisers and other industry insiders who use their expertise to exploit vulnerabilities in the system. Organized crime groups are also behind some of the fraud, the report said.
Perhaps the most disturbing conclusion from the FBI is that "mortgage fraud enables perpetrators to earn high profits through illicit activity that poses a relative low risk for discovery." A low risk of discovery? Haven't we learned anything from the bedlem over the last few years?
The perpetual problem with virtually every area of government regulation is that there are, and never will be, enough examiners, inspectors, auditors, and investigators to enforce all of the regulations. Regulated industries such as the mortgage industry know this, which drives the game of "playing the odds", calculating the enormous gains of skirting the rules with the low probability of getting caught. As government budgets at the federal, state, and municipal level continue to decline during this period of austerity (which will likely last for decades to come), traditional methods of government oversight and enforcement need to be augmented by new and more creative approaches.
First and foremost, government regulators need to focus their attention on the credibility and effectiveness of the regulated industries' own Ethics and Business Conduct programs. Such programs need to be a comprehensive, real, and recognized method for companies to conduct their own self-policing. They must have a values-based emphasis on promoting ethical culture and behavior, as well as contain mechanisms to ensure compliance with the myriad of government regulations and requirements. Key elements include a user-friendly code of thics and business conduct; ethics training that includes a combination of both live and computer-based methods; constant corporate communication on ethics and integrity matters and an unequivocal "tone at the top" of the organization (which includes board of directors involvement); a credible, anonymous employee reporting hotline; and a professional, internal investigative capability. There are many more elements involved, but the basic message is that industry needs to develop its own internal self-policing capability, and government agencies need to focus on evaluating these programs.
Another way to expand the breadth and depth of government oversight is through independent compliance monitoring. The independent compliance monitoring model has been typically used as a reactive alternative to punitive government actions, such as suspension, debarment, or prosecution. In this model, a company, contractor, or regulated entity is found to have violated rules, but the government entity agrees to forgo more punitive action in favor of something akin to "corporate probation". The wayward company or regulated entity pays the monitoring bill, but the private monitor takes direction from, and reports to, the government regulator on whether the company is meeting its responsibilities by fixing the problems that have been identified. This model can be highly remedial and productive by helping regulated entities improve their internal processes and capabilities, thereby preventing future infractions.
Recently, some federal, state, and municipal government regulators have found that independent corporate compliance monitoring can offer more proactive benefits by engaging monitors, as a matter of course, in all high risk contracts in a particular initiative or industry. Monitors, for example, are used frequently in government construction programs (the Port Authority of New York/New Jersey is a great example). Given the high risk of fraud in the mortgage industry, coupled with massive decentralization and a tangled web of requirements and regulations at every level, the placement of independent monitors (at industry expense) could provide the government with just the kind of insight, and oversight, that is badly needed in order to prevent yet another mortgage crisis.
Friday, July 29, 2011
A Year After Dodd-Frank, Too Big To Fail Remains Bigger Problem Than Ever
A Year After Dodd-Frank, Too Big To Fail Remains Bigger Problem Than Ever
Terrific article by Shahien Nasiripour, senior business reporter from the Huffington Post. He writes frequently about Wall Street/corporate fraud issues and attempts at government regulation. In this piece, Shahien takes a critical look at the Dodd-Frank Wall Street Reform Act a year after its passage. He writes that, in spite of all of the hoopla surrounding the enactment of the legislation, little has really changed. The nation's largest banks and brokerage firms are getting bigger; the structural deficiencies and incredible financial incentives that motivated unethical decisions still remain; and the ability of regulators to "mind the store" continues to erode to the point of absurdity. He concludes that, in spite of the new regulations, the economy simply cannot afford to let these banks fail, and they know it. The knowledge that any behavior will ultimately be tolerated creates a kind of institutional arrogance that perverts even the most conservative of free market economy theory, which hold that in a true capitalist system, those institutions which violate the rules of order will pay the ultimate price and will not survive.
One of the problems with the way we have approached banking and finance regulation is that it is almost predominantly reactive in its focus. Legislation creates a set of rules; a whistle blower reveals a violation of the rules; and the regulators must take some kind of punitive action. Unfortunately, those actions often fail to have any deterrent effect, because economic interests are seen to outweigh ethical and legal considerations. In my view, regulators need to focus on proactive, preventive measures by (1) requiring companies to establish genuine business ethics and compliance programs, and have them regularly assessed by an independent third party, (2) leveraging the use of independent corporate compliance monitors, at company expense, to regularly evaluate corporate internal controls and compliance with the most critical regulations that can negatively impact consumers and the economy, and (3) integrating integrity agreements into every administrative, deferred prosecution, and non-prosecution agreement that call for even more intrusive monitoring of company practices on a regular basis, before violations occur.
Terrific article by Shahien Nasiripour, senior business reporter from the Huffington Post. He writes frequently about Wall Street/corporate fraud issues and attempts at government regulation. In this piece, Shahien takes a critical look at the Dodd-Frank Wall Street Reform Act a year after its passage. He writes that, in spite of all of the hoopla surrounding the enactment of the legislation, little has really changed. The nation's largest banks and brokerage firms are getting bigger; the structural deficiencies and incredible financial incentives that motivated unethical decisions still remain; and the ability of regulators to "mind the store" continues to erode to the point of absurdity. He concludes that, in spite of the new regulations, the economy simply cannot afford to let these banks fail, and they know it. The knowledge that any behavior will ultimately be tolerated creates a kind of institutional arrogance that perverts even the most conservative of free market economy theory, which hold that in a true capitalist system, those institutions which violate the rules of order will pay the ultimate price and will not survive.
One of the problems with the way we have approached banking and finance regulation is that it is almost predominantly reactive in its focus. Legislation creates a set of rules; a whistle blower reveals a violation of the rules; and the regulators must take some kind of punitive action. Unfortunately, those actions often fail to have any deterrent effect, because economic interests are seen to outweigh ethical and legal considerations. In my view, regulators need to focus on proactive, preventive measures by (1) requiring companies to establish genuine business ethics and compliance programs, and have them regularly assessed by an independent third party, (2) leveraging the use of independent corporate compliance monitors, at company expense, to regularly evaluate corporate internal controls and compliance with the most critical regulations that can negatively impact consumers and the economy, and (3) integrating integrity agreements into every administrative, deferred prosecution, and non-prosecution agreement that call for even more intrusive monitoring of company practices on a regular basis, before violations occur.
Tuesday, July 19, 2011
UK anti-corruption drive has US companies sweating | Reuters
UK anti-corruption drive has US companies sweating | Reuters
Now is definitely the time for companies to do an "Ethics check-up". An external, independent assessment of corporate ethics and compliance activities can help improve a company's ethics and integrity posture, and proactively demonstrate to government agencies, regulators, oversight bodies, and customers that they are committed to ethical behavior BEFORE a crisis occurs.
Now is definitely the time for companies to do an "Ethics check-up". An external, independent assessment of corporate ethics and compliance activities can help improve a company's ethics and integrity posture, and proactively demonstrate to government agencies, regulators, oversight bodies, and customers that they are committed to ethical behavior BEFORE a crisis occurs.
Friday, July 8, 2011
In Shift, Prosecutors Are Lenient as Companies Break the Law - NYTimes.com
In Shift, Prosecutors Are Lenient as Companies Break the Law - NYTimes.com
Fascinating NY Times piece on DOJ's increasing use of deferred or non-prosecution agreements as an alternative to more aggressive prosecutions of corporations. Although the article is cynical in places, I don't believe that long, expensive prosecutions of companies are always in the public's best interests. In fact, many large corporations conduct a risk/benefit analysis to determine whether a particular business decision, if close to or over the ethical line, would ultimately be in the company's best financial interest if discovered by the government. Aggressive prosecutions, which almost always end in a fine and settlement, are merely part of this calculus.
The effectiveness of deferred prosecution agreements (which save the taxpayer an enormous amount of money) would be greatly enhanced if they routinely included independent corporate compliance monitoring as a condition of the agreement.In this model, the company agrees to an independent monitor looking at books and records, talking to employees, inspecting factory floors - - anything that is germane to the offense being investigated. The government identifies the items to be monitored (such as the accuracy of billings, for example), and the frequency and duration of the monitoring. The Independent Monitoring firm provides technical experts, ensures there are no conflicts-of-interest, and prepares reports on the company's compliance to the government. Typically, the monitor will also assess the company's Corporate Ethics and Compliance Program to ensure it is robust, effective, and actually ensuring an ethical corporate culture. The monitor would also assess a company's internal controls and identify process deficiencies that may have led to the initial offenes, making recommendations to the company along the way.
Independent monitoring helps protect the taxpayer; extends the oversight capability of government agencies and regulators; and (if done properly) helps the contractor remedy many of the bad processes that led to their problems in the first place.The government receives regular monitoring reports, but the total cost is borne by the company, not the taxpayer. At a time of severe budget austerity and increasing demands for accountability of government funds, the expanded use of deferred prosecution agreements that contain requirements for independent monitoring is simply a "no-brainer."
Fascinating NY Times piece on DOJ's increasing use of deferred or non-prosecution agreements as an alternative to more aggressive prosecutions of corporations. Although the article is cynical in places, I don't believe that long, expensive prosecutions of companies are always in the public's best interests. In fact, many large corporations conduct a risk/benefit analysis to determine whether a particular business decision, if close to or over the ethical line, would ultimately be in the company's best financial interest if discovered by the government. Aggressive prosecutions, which almost always end in a fine and settlement, are merely part of this calculus.
The effectiveness of deferred prosecution agreements (which save the taxpayer an enormous amount of money) would be greatly enhanced if they routinely included independent corporate compliance monitoring as a condition of the agreement.In this model, the company agrees to an independent monitor looking at books and records, talking to employees, inspecting factory floors - - anything that is germane to the offense being investigated. The government identifies the items to be monitored (such as the accuracy of billings, for example), and the frequency and duration of the monitoring. The Independent Monitoring firm provides technical experts, ensures there are no conflicts-of-interest, and prepares reports on the company's compliance to the government. Typically, the monitor will also assess the company's Corporate Ethics and Compliance Program to ensure it is robust, effective, and actually ensuring an ethical corporate culture. The monitor would also assess a company's internal controls and identify process deficiencies that may have led to the initial offenes, making recommendations to the company along the way.
Independent monitoring helps protect the taxpayer; extends the oversight capability of government agencies and regulators; and (if done properly) helps the contractor remedy many of the bad processes that led to their problems in the first place.The government receives regular monitoring reports, but the total cost is borne by the company, not the taxpayer. At a time of severe budget austerity and increasing demands for accountability of government funds, the expanded use of deferred prosecution agreements that contain requirements for independent monitoring is simply a "no-brainer."
Thursday, July 7, 2011
Wednesday, June 29, 2011
A Wake Up Call for Boards and CECOs
In the July 2011 edition of Fraud Magazine (published by the Association of Certified Fraud Examiners)., Sheila Keefe, CFE, CPA writes a wonderful article about how Audit Committees should be worried: it seems that the SEC is finally holding Boards of Directors, particularly those serving on Audit Committees, responsible for the shenanigans that go on right under there noses at the companies they "direct".
Sheila sites a February 28 SEC decision to charge three ex-directors and audit committee members of DHB Industries for failure to address a growing fraud in their organization. This follows the conviction last last September of the DHB CEO and COO on multiple counts of securities fraud, insider trading, and obstruction of justice. The SEC is now prosecuting the ex-directors because their lack of oversight allowed senior management to manipulate results and to funnel millions of dollars to DHB's founder to pay for luxury cars, vacations, art and even prostitutes. The SEC noted that , "as the fraud swirled around them," the directors "ignored the obvious".
The SEC's action is a clear wake-up call for Boards of Directors. Equally as important, it is a wake-up call for CEOs and Chief Ethics and Compliance Officers (CECOs), whose duty it is to create an ethical culture that promotes integrity from the Board room to the mail room. While CECOs can't control a Board's actions or inactions, they can take a number of simple steps to get the Board actively involved in the company's Ethics and Compliance activities:
1. Develop a Board training curriculum (not a one-time Powerpoint presentation) to promote their awareness of, and engagement in, ethics and compliance in the company..
2. Use a combination of relevant, targeted statistics and real world examples from the frontlines to underscore the risks and the efforts of the program to mitigate those risks.
3. Ensure that all reports to the Board are directly in support of the Board's oversight role, and articulate this clearly and often.
4. Collaborate with other functions in the company to reduce redundancy, clarify inconsistencies, and maximize relevancy of the CECO report
5. Cultivate a balanced judgment on what Boards really need to hear to support their oversight role. Avoid both "the sky is falling" and "everything is coming up roses" scenarios and provide credible, objective reporting in proper context, supported by compelling facts
"Tone at the Top" is a commonly used phrase to describe what the CEO and executives need to do to promote an ethical culture. Clearly, if we are to succeed in creating real ethical change, accountability of the Board, as recently implemented by the SEC, will help redefine exactly where the "top" might be.
Sheila sites a February 28 SEC decision to charge three ex-directors and audit committee members of DHB Industries for failure to address a growing fraud in their organization. This follows the conviction last last September of the DHB CEO and COO on multiple counts of securities fraud, insider trading, and obstruction of justice. The SEC is now prosecuting the ex-directors because their lack of oversight allowed senior management to manipulate results and to funnel millions of dollars to DHB's founder to pay for luxury cars, vacations, art and even prostitutes. The SEC noted that , "as the fraud swirled around them," the directors "ignored the obvious".
The SEC's action is a clear wake-up call for Boards of Directors. Equally as important, it is a wake-up call for CEOs and Chief Ethics and Compliance Officers (CECOs), whose duty it is to create an ethical culture that promotes integrity from the Board room to the mail room. While CECOs can't control a Board's actions or inactions, they can take a number of simple steps to get the Board actively involved in the company's Ethics and Compliance activities:
1. Develop a Board training curriculum (not a one-time Powerpoint presentation) to promote their awareness of, and engagement in, ethics and compliance in the company..
2. Use a combination of relevant, targeted statistics and real world examples from the frontlines to underscore the risks and the efforts of the program to mitigate those risks.
3. Ensure that all reports to the Board are directly in support of the Board's oversight role, and articulate this clearly and often.
4. Collaborate with other functions in the company to reduce redundancy, clarify inconsistencies, and maximize relevancy of the CECO report
5. Cultivate a balanced judgment on what Boards really need to hear to support their oversight role. Avoid both "the sky is falling" and "everything is coming up roses" scenarios and provide credible, objective reporting in proper context, supported by compelling facts
"Tone at the Top" is a commonly used phrase to describe what the CEO and executives need to do to promote an ethical culture. Clearly, if we are to succeed in creating real ethical change, accountability of the Board, as recently implemented by the SEC, will help redefine exactly where the "top" might be.
Wednesday, June 1, 2011
Toyota and Ethical Culture
Check out this article from the LA Times on 24 May:
http://articles.latimes.com/2011/may/24/business/la-fi-toyota-safety-20110523
The article describes a 60 page report from Toyota's North American Quality Advisory Panel, which found that the company responded slowly and inefficiently to the sudden acceleration "crisis" involving its automobiles because it was hampered by a top-down management style that gave "short shrift" to customer complaints. The report also found that the company had come to regard federal safety regulators as "adversaries", and had developed an institutional arrogance as an unintended consequence of of its drive to become the world's largest automaker.
While neither the report nor the newspaper article mention "ethics" even once, both conclude that Toyota's culture was "at the root of its woes". In my view, Toyota's woes were all about corrosion of its corporate ethical culture. One can tell a lot about a company by how it responds to a crisis. The lack of transparency; the arrogance for regulators; and the company's refusal to own up to the safety problems that had killed and injured many of its customers reveal that Toyota had strayed from its core values as a company, focusing on the short-term cost of recalls (and impact on stock prices) rather than its longer-term commitment to quality and safety.
It's amazing how much time and effort it takes for a company to develop "reputational capital", and how quickly it can be lost by straying from the corporate "ethical compass" in the heat of a crisis. What do you think of when you hear the name Toyota? How about BP? Goldman Sachs? Lehman Brothers? The answer would have been different just a few years ago. This is why Ethics and Compliance programs, (emphasis on the ETHICS part) are so important. Bad behavior of employees is uncontrollable; disasters are unforseeable; but how prepared a company is to respond appropriately is a product of leadership and employee commitment; an incentive structure that rewards integrity; a meaningful code of conduct; substantive training; appropriate rewards and sanctions ; and an involved Board of Directors - - all of the ingredients for a sound, sustainable ethical culture.
http://articles.latimes.com/2011/may/24/business/la-fi-toyota-safety-20110523
The article describes a 60 page report from Toyota's North American Quality Advisory Panel, which found that the company responded slowly and inefficiently to the sudden acceleration "crisis" involving its automobiles because it was hampered by a top-down management style that gave "short shrift" to customer complaints. The report also found that the company had come to regard federal safety regulators as "adversaries", and had developed an institutional arrogance as an unintended consequence of of its drive to become the world's largest automaker.
While neither the report nor the newspaper article mention "ethics" even once, both conclude that Toyota's culture was "at the root of its woes". In my view, Toyota's woes were all about corrosion of its corporate ethical culture. One can tell a lot about a company by how it responds to a crisis. The lack of transparency; the arrogance for regulators; and the company's refusal to own up to the safety problems that had killed and injured many of its customers reveal that Toyota had strayed from its core values as a company, focusing on the short-term cost of recalls (and impact on stock prices) rather than its longer-term commitment to quality and safety.
It's amazing how much time and effort it takes for a company to develop "reputational capital", and how quickly it can be lost by straying from the corporate "ethical compass" in the heat of a crisis. What do you think of when you hear the name Toyota? How about BP? Goldman Sachs? Lehman Brothers? The answer would have been different just a few years ago. This is why Ethics and Compliance programs, (emphasis on the ETHICS part) are so important. Bad behavior of employees is uncontrollable; disasters are unforseeable; but how prepared a company is to respond appropriately is a product of leadership and employee commitment; an incentive structure that rewards integrity; a meaningful code of conduct; substantive training; appropriate rewards and sanctions ; and an involved Board of Directors - - all of the ingredients for a sound, sustainable ethical culture.
Monday, April 11, 2011
Are Ethics for Suckers?
Check out this Newsweek article from April 10: http://www.newsweek.com/2011/04/10/are-ethics-for-suckers.html
In the aftermath of the resignation of Warren Buffet's protege, David Sokol (who resigned after pocketing $3 million from trading stock of a chemical company Berkshire Hathaway was acquiring), questions are once again being asked about what it really takes to succeed in finance in this country. The article questions whether bankers think of the law as something to be scoffed at, and ethics as only for suckers. Even Vanguard Group founder John Bogle says "What you're seeing on Wall Street is disgusting". Bogle uses the phrase "moral relativism", which I think perfectly describes the problem we have as a society, not just on Wall Street. Former Goldman Sachs Chief John Whitehead is quoted as saying "We're dealing with more difficult problems than ever before, and its simply harder to maintain standards of ethics and doing business."
The article describes a culture of success where more and more people feel they need to bend the rules, because the rewards are so way out of proportion. It concludes that the geometric growth of the money and scope of Wall Street has put an enormous strain on ethics and business, leaving a path of reputational destruction. For example, Goldman Sachs became known in the 80s for its integrity and not doing the thing that made the most money through policies such as avoiding the financing of hostile takeovers. Today, Goldman has been "cast as an empire of greed." A former Lehman Brothers lawyer says that "Morals, ethics--thats not their job. The view on the Street is that that's Congress's job".
Now, all we have to do is get lawmakers to hold companies accountable for strengthening a culture of ethics and integrity in their operations, which goes beyond strict adherence to laws which are often intentionally fuzzy and imprecise. Sadly, however, Congressional credibility is lacking in the ethics arena. How about an independent ethics assessment of the Congress as a good place to start?
In the aftermath of the resignation of Warren Buffet's protege, David Sokol (who resigned after pocketing $3 million from trading stock of a chemical company Berkshire Hathaway was acquiring), questions are once again being asked about what it really takes to succeed in finance in this country. The article questions whether bankers think of the law as something to be scoffed at, and ethics as only for suckers. Even Vanguard Group founder John Bogle says "What you're seeing on Wall Street is disgusting". Bogle uses the phrase "moral relativism", which I think perfectly describes the problem we have as a society, not just on Wall Street. Former Goldman Sachs Chief John Whitehead is quoted as saying "We're dealing with more difficult problems than ever before, and its simply harder to maintain standards of ethics and doing business."
The article describes a culture of success where more and more people feel they need to bend the rules, because the rewards are so way out of proportion. It concludes that the geometric growth of the money and scope of Wall Street has put an enormous strain on ethics and business, leaving a path of reputational destruction. For example, Goldman Sachs became known in the 80s for its integrity and not doing the thing that made the most money through policies such as avoiding the financing of hostile takeovers. Today, Goldman has been "cast as an empire of greed." A former Lehman Brothers lawyer says that "Morals, ethics--thats not their job. The view on the Street is that that's Congress's job".
Now, all we have to do is get lawmakers to hold companies accountable for strengthening a culture of ethics and integrity in their operations, which goes beyond strict adherence to laws which are often intentionally fuzzy and imprecise. Sadly, however, Congressional credibility is lacking in the ethics arena. How about an independent ethics assessment of the Congress as a good place to start?
The Low Price of Fraud
http://www.huffingtonpost.com/2011/04/07/sec-takes-lighttouch-appr_n_846289.html
The attached article from the Huffington Post describes the increasing trend of financial services companies using a "risk/reward" calculation to justify unethical business decisions. As was all too common during the financial meltdown, the nation's fourth-largest bank agreed to pay an $11 million fine this week to settle federal charges that it misled investors by hiding critical facts and charging them excessive prices on portions of two billion-dollar securities during the height of the housing boom.
Or put another way: for a mere $11 million, one of the world's biggest investment firms was able to violate basic investor protection rules, defraud its customers, not admit wrongdoing, avoid a trial and likely pocket the profit off similar deals. Interestingly, none of this activity was, per se, "illegal". But by anyone's standards, including the regulatory oversight agencies involved, it was all unethical.
Facing the prospect of making billions in shady deals, with only a few million in fines possible if caught, this risk/reward structure creates an environment that incentivizes unethical behavior. How, then, can we promote an ethical business culture with such built in disincentives to do what's right? One way is to vastly increase the possible fines for violating securities regulations that can seriously harm the public. Another way is for the SEC, and other federal and state agencies and regulatory boards, to increase their utilization of independent corporate compliance monitoring in a bid to ensure wholesale reform within public companies and better protect the public. Here's how it works:
The attached article from the Huffington Post describes the increasing trend of financial services companies using a "risk/reward" calculation to justify unethical business decisions. As was all too common during the financial meltdown, the nation's fourth-largest bank agreed to pay an $11 million fine this week to settle federal charges that it misled investors by hiding critical facts and charging them excessive prices on portions of two billion-dollar securities during the height of the housing boom.
Or put another way: for a mere $11 million, one of the world's biggest investment firms was able to violate basic investor protection rules, defraud its customers, not admit wrongdoing, avoid a trial and likely pocket the profit off similar deals. Interestingly, none of this activity was, per se, "illegal". But by anyone's standards, including the regulatory oversight agencies involved, it was all unethical.
Facing the prospect of making billions in shady deals, with only a few million in fines possible if caught, this risk/reward structure creates an environment that incentivizes unethical behavior. How, then, can we promote an ethical business culture with such built in disincentives to do what's right? One way is to vastly increase the possible fines for violating securities regulations that can seriously harm the public. Another way is for the SEC, and other federal and state agencies and regulatory boards, to increase their utilization of independent corporate compliance monitoring in a bid to ensure wholesale reform within public companies and better protect the public. Here's how it works:
- A company violates a law, regulatory rule, or otherwise violates the public trust
- The oversight agency conducts an investigation and threatens to suspend, debar, fine, or otherwise punish the company in a significant manner
- In order for that company to continue providing service to the public or the government in a manner that protects the taxpayer, the oversight agency agrees to allow the company to continue operating IF it agrees to regular monitoring by an outside, independent organization that the the government hires
- The independent corporate compliance monitoring firm monitors the company's performance against a number of areas specified by the government, and regularly reports back to the government on the sate of the company's compliance
- The company, NOT the government or the taxpayer, pays for the cost of the compliance monitoring service
Wednesday, March 9, 2011
SEC Update: Failure of "Tone at the Top" and General Counsel Conflicts
As if things couldn't get worse at the SEC, check out today's Washington Post link:
The SEC Chair amazingly relied on the former General Counsel himself and an "Agency Ethics Officer" (who is also an attorney in the General Counsel's office) to "sort out" the potential conflicts of interest involving the GC's inheritance of Madoff accounts from his mother's estate. This could be a Harvard Business Review case study in exactly how an organization should NOT approach its corporate ethics responsibilities. Tone at the top? None. Separation of duties between the General Counsel and the Ethics Officer? None. Nurturing of an ethical culture at the SEC? Not quite. This is definitely going to get ugly.
Its time for other governmental regulatory agencies at the federal, state, and local levels to look themselves in the mirror, apply the horrendous case study of the SEC's failure to maintain the public trust, and conduct a self-assessment of their own ethics and integrity posture.
Monday, March 7, 2011
Ethics vs. Compliance: Conflicts Can Undermine An Organization's Credibility
See this article about a major conflict of interest at the SEC that undermines its credibility in the Madoff matter:
http://www.washingtonpost.com/wp-dyn/content/article/2011/03/04/AR2011030406203.html
In the case described above, the SEC official in question had inherited funds from Madoff accounts after the death of his mother. He must have known this could, at a minimum, "appear" to taint his objectivity and credibility (and that of the SEC) if he were to participate in the investigation of the Madoff Ponzi scheme. In fact, he went as far as to ask the SEC General Counsel for a legal opinion. Unfortunately, he received bad advice, telling the official that there was no conflict of interest and that he could participate.
Herein lies the difference between organizational compliance and values-based ethics. A strict interpretation of law yielded an opinion that the SEC official who cashed-in Madoff accounts inherited from his mother, and was the potential target of a lawsuit from other investors, could legally participate in the subsequent Madoff investigation. But ethically speaking, was this the right decision for the SEC? Legal or not, doesn't it undermine the credibility of an already embattled SEC with the Congress, the taxpayers, and thousands of investors who believe the SEC failed to do its due diligence in the first place?
A world-class Ethics and Compliance Program goes beyond the minimal legal requirements and addresses both actual conflicts and the appearance of conflicts of interest, always assessing the organization's vulnerability to outside criticism that can undermine its integrity, credibility, and profitability. What kind of program does your organization have?
http://www.washingtonpost.com/wp-dyn/content/article/2011/03/04/AR2011030406203.html
In the case described above, the SEC official in question had inherited funds from Madoff accounts after the death of his mother. He must have known this could, at a minimum, "appear" to taint his objectivity and credibility (and that of the SEC) if he were to participate in the investigation of the Madoff Ponzi scheme. In fact, he went as far as to ask the SEC General Counsel for a legal opinion. Unfortunately, he received bad advice, telling the official that there was no conflict of interest and that he could participate.
Herein lies the difference between organizational compliance and values-based ethics. A strict interpretation of law yielded an opinion that the SEC official who cashed-in Madoff accounts inherited from his mother, and was the potential target of a lawsuit from other investors, could legally participate in the subsequent Madoff investigation. But ethically speaking, was this the right decision for the SEC? Legal or not, doesn't it undermine the credibility of an already embattled SEC with the Congress, the taxpayers, and thousands of investors who believe the SEC failed to do its due diligence in the first place?
A world-class Ethics and Compliance Program goes beyond the minimal legal requirements and addresses both actual conflicts and the appearance of conflicts of interest, always assessing the organization's vulnerability to outside criticism that can undermine its integrity, credibility, and profitability. What kind of program does your organization have?
Tuesday, February 1, 2011
Public Trust in U.S. Business Tumbles
See the article posted on the CIG site (Ethics News/Articles) : Public Trust in U.S. Business Tumbles
http://www.reuters.com/article/2011/01/25/us-corporate-trust-idUSTRE70O1JO20110125
Public trust in business began to erode during the accounting scandals of the 1990s and early 2000s, but dropped like a brick during the financial crisis. The 2010 survey shows it is getting even worse, down to 46 percent. What does this mean for business? U.S. businesses are under the gun by shareholders, boards, and employees to tighten their belts and meet their financial metrics in order to survive. However, there are often unintended ethical consequences of "making the numbers or else" as the sole performance metric in a company. Without a strong ethical culture driven by committed, involved leadership at all levels, good ethical decision making can wind up taking a back seat.
For government contractors, a lack of emphasis on ethics and integrity could be catastrophic. Recent changes to the Federal Acquisition Regulations (FAR) require agencies to assess a company's record of integrity and business ethics (i.e. their "ethical posture") as part of the source selection process. In an era of tightening budgets (at the federal, state and local levels), and shrill calls by taxpayers for increased accountability over public funds, a company's ethical posture is going to become an increasingly important factor in whether or not they get a contract.
Core Integrity Group can help companies demonstrate their due diligence and commitment to ethics and integrity by conducting an independent assessment of their Ethics and Compliance programs; making recommendations for improvement; and designing a strategy for highlighting their ethics posture to their important government customers.
http://www.reuters.com/article/2011/01/25/us-corporate-trust-idUSTRE70O1JO20110125
Public trust in business began to erode during the accounting scandals of the 1990s and early 2000s, but dropped like a brick during the financial crisis. The 2010 survey shows it is getting even worse, down to 46 percent. What does this mean for business? U.S. businesses are under the gun by shareholders, boards, and employees to tighten their belts and meet their financial metrics in order to survive. However, there are often unintended ethical consequences of "making the numbers or else" as the sole performance metric in a company. Without a strong ethical culture driven by committed, involved leadership at all levels, good ethical decision making can wind up taking a back seat.
For government contractors, a lack of emphasis on ethics and integrity could be catastrophic. Recent changes to the Federal Acquisition Regulations (FAR) require agencies to assess a company's record of integrity and business ethics (i.e. their "ethical posture") as part of the source selection process. In an era of tightening budgets (at the federal, state and local levels), and shrill calls by taxpayers for increased accountability over public funds, a company's ethical posture is going to become an increasingly important factor in whether or not they get a contract.
Core Integrity Group can help companies demonstrate their due diligence and commitment to ethics and integrity by conducting an independent assessment of their Ethics and Compliance programs; making recommendations for improvement; and designing a strategy for highlighting their ethics posture to their important government customers.
Saturday, January 29, 2011
Welcome to the Core Integrity Group Blog!
Welcome to our blog.
Here, we'll discuss the latest news in the world of Ethics and Integrity.
Check back often!
Here, we'll discuss the latest news in the world of Ethics and Integrity.
Check back often!
Subscribe to:
Posts (Atom)