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.

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.