A longer version of this article will appear in an upcoming May/June 2012 print edition of Ethikos.

(Posted April 10, 2012)

While there has been much talk in the past year about the UK Bribery Act, and the recent burst of prosecutions under the U.S. Foreign Corrupt Practices Act (FCPA), China quietly passed its own ‘FCPA-like’ law in 2011. Just how will this law affect businesses abroad?

“China is one of those markets in which companies are already invested and if not, they will be there soon,” noted Scott Lane, CEO of The Red Flag Group, an advisory firm. “It's not very much what is said in the law--the law is one sentence. It's what is not said,” said Lane, speaking last week at the Dow Jones Global Compliance Symposium’s panel, ‘China: What Does Its Foreign Bribery Provision Really Mean For Your Company?’

What is important, Lane says, is the supporting regulations and, even more, government policy. Enforcement and interpretation of the law may vary region by region in China.

The Chinese bribery laws come within that nation’s criminal law code. There have been eight major amendments on these particular laws. The most recent one, February 2011, “essentially added a provision for foreign bribery. Broadly speaking, it's the same principle as the FCPA,” says Lane, i.e., employees will be punished if they bribe foreign officials. The law applies to Chinese citizens (wherever they're located), individuals of any nationality within China, and companies that do business in China.

“Whether you're a foreign investor or not, it doesn't matter. If you're in China, you're subject to this clause,” says Lane. While existing law has covered domestic bribery--this one is targeted towards international bribery.

“Are their exceptions? No. Are their adequate procedures? There don’t appear to be any. Are their definitions? ... doesn't appear to be any. Guidance? There doesn't appear to be any.”

Is there a concept of voluntary disclosure? Yes, surprisingly enough. “In fact, the law does cover voluntary disclosure. It does provide for some leniency,” although it does not elaborate what sort of leniency might be provided to a company that voluntarily reports.

“In some respects, talking about this issue a year after this law has been passed is like talking in 1978 about ‘what is the FCPA going to do for your company?’” observed Mike Koehler, Assistant Professor of Business Law at Butler University and author of ‘The FCPA Professor’ blog, who moderated the panel.

According to Christopher Burnham, Vice Chairman, Deutsche Asset Management, another panelist, “Ultimately it doesn't change anything, because to comply fully with the Foreign Corrupt Practices Act, we're going to be doing already the things that this law requires.”

China is still learning how to implement its new anti-bribery laws, and, according to Burnham, the structure of enforcement is just not there—yet.

He foresees challenges in the future. “We have our own internal compliance program and it’s difficult because every time I go to China I get a book, I get a scroll, and you feel inadequate if you don't bring something in return.” Gift-giving is integral to Chinese business and when unchecked this can be a huge risk.

So what is the future of China’s new anti-bribery legislation?

Change is on the horizon, at least in near future, according to Matthew J. Feeley of Buchanan Ingersoll & Rooney PC, another panelist. “It may take years before we actually see enforcement. I can tell you that the Chinese and the U.S. government are working closely together--the U.S. point of view is to show the Chinese how we enforce our law and hope that they'll take steps to enforce their law.”

He expects it will take three or four years to see some signs of enforcement.

— Alexandra Theodore

A longer version of this story will appear in an upcoming print edition of Ethikos.

(Posted April 3, 2012)

When Travelex Currency Services, the retail foreign exchange specialist, first considered expanding into Panama and Brazil, it asked some tough questions:

“First, is this a jurisdiction where we can uphold our values?” recalled Daniel L. Tannebaum, Chief Compliance Officer. “And secondly, is this a jurisdiction where we can keep our staff safe?”

In the case of Brazil, the move came after a ten-year partnership, said Tannebaum, speaking this morning at the Dow Jones Compliance Symposium in Washington, D.C. “You go in, you learn the laws. Once you get comfortable with the laws you meet with the UK Embassy and the US embassy, and you build out from there.”

What's important is “Having as much time on the ground as possible,” said Tannebaum, speaking at a general session called “Emerging Markets: What Can You Do To Make Sure Your Company Emerges Unscathed?”

The risk of using third parties in emerging markets was something on everyone's mind at the Symposium, with the vast majority of attendees indicating it is their biggest concern, according to a conference-wide poll conducted this morning (March 27).

In the case of Travelex, which has more than 700 branded retail branches, principally in airports and tourist locations, and operates in four regions—the United Kingdom; Europe, Middle East, India and Africa (EMEA); Americas and Asia Pacific: "Compliance has had the authority to end an engagement in a country if it proves too much of a risk," said Tannebaum. Having a good business partner can help, but the assessment can take as much as four months (in Panama) before compliance feels comfortable with allowing that expansion to go forward.

When it comes to emerging markets like Brazil, "Most of the time you will be dealing with privately owned or family-owned companies that are the target," said Francisco Hernandez, Latin American Regional Counsel, Tyco International, another speaker at the Symposium. "You want to dig many years back into the books of the company. You want to have the opportunity to sit down with employees and vendors of their companies."

"You're not going to talk about a 'risk free' opportunity, that doesn't exist," said Hernandez.

Neil Keenan, Partner, PricewaterhouseCoopers LLP, another panelist, noted: "We've seen companies get themselves into various issues as a result of operating outside of their license."

For example, "Expatriates who are fluent in the language are a hot commodity" for expanding companies and they often "hop from company to company." Finding out who these people are is important because on occasion "they'll get in trouble and then just hop off to the next company."

According to Ty Cobb, a partner with Hogan Lovells, another panelist: "You want your internal audits to go through the books and records of the company you're looking to do business with." Everyone asks for this, but few get it. "In South America it's particularly difficult to do—in Africa it's impossible."

-- Alexandra Theodore

A longer version of this story will appear in an upcoming print edition of Ethikos.

(Posted March 27, 2012)

General Electric—s Brackett Denniston provides a grim example of a compliance issue that can take an organization by surprise:

“We got an ombuds report regarding a compliance failure in our nuclear energy branch,” GE—s general counsel told an audience at the 4th Annual Global Ethics Summit in New York last week. The issue involved reactors that GE had sold to the Tokyo Electric Power Company (TEPCO), the utility that owns the tsunami-ravaged Fukushima Daiichi Nuclear Power Station and provides almost 35% of Japan—s electricity.

"A former employee said GE had been falsifying information about our reactors" with regard to monitoring and maintenance. However, when the issue was initially investigated by GE, many employees told him that everything was fine.

"Then we were told they had lied. TEPCO had asked them to lie about the reactors. They would falsify records." In one case, he noted, inspection videos would be shot in such a way as to avoid showing a crack in a reactor that had been hastily patched.

"It was shocking," recalls Denniston. "The root cause was a weak compliance structure (in Japan). You have to fight the notion that the customer is always right.”

A longer version of this story will appear in the upcoming March/April print edition of Ethikos.

(Posted March 20, 2012)

First there was ethics hotline reporting via telephone. Then came reporting through the Internet. Now some companies are offering employees hotline reporting via text message.

One of these is Office Depot, the Florida-based office supply company, which has 40,000 employees globally. “It’s about keeping up with how people communicate,” Robert Brewer, Chief Compliance Officer, tells Ethikos. “We try to keep our finger on the pulse of technology and how to get our message across.”

Because text messaging has become an increasingly popular form of communication, particularly for younger employees, Office Depot made a special effort to develop this reporting option.

Employees can now text their concerns to a company number, where the process is then managed by a third party.

The trickiest part was figuring out how to enact text-based reporting and preserve the sender's anonymity, Brewer tells Ethikos. Presently all reports, by phone, website, or text, are conveyed to Michelle Lowry, the Senior Manager of International Compliance at Office Depot. There is no way to identify the channel by which the reports arrive. This is to prevent text messages from being tracked back to the cell phone from which they came.

The response has been positive. Providing employees with additional channels or ways to speak out has increased the number that choose to do so, says Brewer. At present, 50% of all hotline reports arrive from channels other than the traditional phone line. A good portion of these are via text-message, and Brewer says that number is rising.

Office Depot expanded its reporting hotline in 2010. It was extended to employees outside the U.S. who may now address their concerns to a company website in their own language. Office Depot has been able to negotiate with local laws to preserve their anonymity.

— Alexandra Theodore

The complete article will appear in the upcoming (March/April 2012) print version of Ethikos.

(Posted March 13, 2012)

February 21, 2012—Thomas J. Tropp, Vice President of Corporate Ethics and Sustainability at Arthur J. Gallagher & Co. (Itasca, IL), is on the road most every week. Last year he visited most of the insurance brokerage firm’s 225 global offices—from Singapore to Sao Paulo—speaking and listening to Gallagher employees regarding the values of the company and the role of ethics in business.

Over the last three years, he has addressed more than 10,000 of the company’s 13,000 employees in small group settings.

It’s often “little things” that he finds out on these branch visits—like reports that the people who manned A.J. Gallagher’s IT Help Desk “were just nasty,” he recalls in an interview with Ethikos.

What did that mean? After making a report or complaint, people in the branch office would get a message via email along the lines of: “the issue is resolved and we’re closing the ticket.” That message was not signed by an individual, just “the Help Desk.“ And sometimes the issue was not resolved, employees complained.

Tropp spoke with the IT people. They changed some processes. Now people receive this kind of message if they are having trouble with their computer: “Dear Eileen, the issue appears to have been resolved. However, if it is not resolved, please call this number,” and it is signed by an individual.

Tropp has been to all of Gallagher’s 225 offices twice since assuming his role in January 2010, and he is now on his third round of visits. Last year he traveled to Australia, the UK, Brazil, India, Singapore, the Caribbean, and China in addition to Gallagher’s U.S. offices.

He is almost like an ombudsman. A.J. Gallagher, like other firms, has an ethics hotline, but it receives only about ten phone calls a year. By comparison, Tropp receives 20-25 emails weekly from people in field.

During the branch meetings, which last about an hour, he’ll be looking for macro issues—problems that have come up at other offices, too. “I’m looking for systemic issues.”

He'll speak for about 20 minutes at the start of the sessions, talking about the company's values and telling stories from other offices, about how people deal with each other—some of the “nice things” that people are doing for other people, for instance. Then he opens up the floor for discussion.

“The more they see me, the more they open up. They tell me more things between and after meetings than during meetings.”

Tropp sits down each month with CEO Pat Gallagher, to whom he reports. He'll usually have three or four things to discuss. Gallagher will often pick up the telephone while he's there and call a senior manager about a given problem, “Tom is coming right down now. We're going to resolve it now.”

Tropp's view is that there is a big difference between compliance and ethics. Compliance is about what you must do. Ethics is about what you should do. He joined A.J. Gallagher in 2007 through the acquisition of Tropp & Company, Inc., the private, Chicago-based insurance brokerage firm of which he was president and founder. In 2003, while continuing to operate his own firm, he began to pursue a Master of Arts in Philosophical and Theological Ethics from the University of Chicago, completing his degree in 2007.

With regard to the role he plays at Arthur J. Gallagher, it's all about being respectful, Tropp told us. When he meets with groups, he asks them what is bothering them, and they often tell him. But they have to be asked in the right way, and that takes some experience, patience and skill.

— Andrew Singer

The complete article will appear in the upcoming (March/April 2012) print version of Ethikos.

(Posted April 28, 2012)

February 14, 2012 -- The key to regaining public trust after a scandal is the swiftness of a company’s response, the accuracy of its problem diagnosis, and the installation of proper mechanisms to prevent the problem from occurring again, says the UK’s Institute of Business Ethics (IBE).

One of the companies IBE follows in a study published this week is Siemens, the German engineering giant that came under fire in 2006 for siphoning off millions of Euros into “phoney consultants’ contracts, false bills and shell firms” in order to pay massive bribes to win contracts. A trial judge condemned the company’s actions as “a system of organized irresponsibility that was implicitly condoned.”

But Siemens eventually turned things around.

In 2007, under the auspices of newly appointed CEO, Peter Löscher, the firm launched a month-long amnesty program for employees to come forward, excluding former directors. Forty whistleblowers brought more incriminating evidence, extending the scandal’s reach into the previous management Board. Transparency International Co-Founder Michael Hershman was brought on board as an advisor.

Siemens also launched a comprehensive program of training and education on anti-corruption practices for its employees.

“By 2008, Siemens had trained more than half its 400,000-strong global workforce on anti-corruption issues, whether on web-based courses or in ‘classroom’ formats. Siemens also signaled a shift in strategy, in terms of commercial opportunities, announcing early on (February 2007) that it would avoid competing in certain known hotspots for corruption or unethical practice such as Sudan — a simple gesture, though not materially punishing to the company’s finances,” notes IBE.

In 2006, Siemens had 86 full-time compliance officers. It has since hired over 500 full-time compliance officers. A new investigation unit was established led by a former Interpol official — a move noted by IBE to be “a tangible investment in controlling for trustworthy conduct.”

All in all, Siemens' very public restructuring and streamlining of its systems served to instill a genuine sense of change to the public.

In retrospect, Siemens’ initial response was lukewarm at best, with key executives downplaying the extent of the scandal, according to the IBE study, “The Recovery of Trust: Case studies of organizational failures and trust repair.” However, the company’s success in rebuilding its reputation owes much to the later mechanisms installed to prevent repeat offenses, a process which IBE refers to as “distrust regulation.”

According to IBE, Siemens’ “full response to the scandal has been widely praised by many independent anti-corruption and ethics experts, including the Organization for Economic Co-operation and Development (OECD), and U.S. Federal authorities.”

Overall, to be ethical is to be trustworthy, suggests the study, which compiles case studies on several organizations that suffered large scandals in the past five years (Siemens, Mattel, Toyota, The BBC, BAE Systems, and Severn Trent) and tracks what actions they have taken in order to regain consumer trust.

Whether or not a company is seen as trustworthy can greatly influence whether or not a consumer is willing to do business with them. When a company suffers a massive hit to its trustworthiness—a public scandal, a wide-scale recall, or a corruption flap—regaining consumers’ trust may not be an easy task, notes IBE:

“Trust is a fundamental building block to any successful organization. Yet trust is at a premium for many contemporary organizations.” Indeed, “surveys point to a persistent and debilitating skepticism among customers, investors and other stakeholders in the trustworthiness of the business world.”

In the Siemens’ case, the executive charged with overseeing its compliance and ethics, Peter Solmssen, said in October 2008: “We are quite confident we have eliminated anything systemic... But it’s never over.”

The real test comes from establishing a better company culture, according to Hershman. “There are new processes, new people, new procedures... but that does not make a difference in the world unless there is a change in culture.”

The financial cost of the scandal and the restructuring that resulted was high. In total, Siemens lost approximately $US3.2 billion, including fines ($US3 billion), the cost of an exhaustive analysis of its financial transactions, bail payments for indicted executives, and fees to outside advisers (approximately $US85 million).

The cost to Siemens’ employees? That is hard to say. “Two long years of shame under intense and hostile public scrutiny, especially in Germany, is difficult to calculate,” concludes IBE.

For more on the study, click here.

— Alexandra Theodore

(Posted February 14, 2012)

January 31, 2012 -- You probably can’t find a country in the world where bribery is legal, says Brian Loughman. But anti-bribery laws mean nothing if they are not enforced. That’s why recent developments are encouraging.

There’s been a “huge ramp up in [anti-corruption] enforcement activity” globally, notes Loughman, Americas Leader, Fraud Investigation & Dispute Services, Ernst & Young LLP, and co-author of Bribery & Corruption: Navigating the Global Risks, published January 26 by John Wiley and Sons.

“Germany has been very active.” And not just in prosecuting big name cases like Siemens’, Loughman told Ethikos. Germany had 135 foreign bribery enforcement cases in 2010, second only to the U.S.’s 227 cases, according to Transparency International’s 2011 Progress Report.

Germany now has its own Foreign Corrupt Practices Act-type law and has published standards for auditing and compliance programs.

Prosecutors in Italy have recently taken anti-bribery cases, and there is more enforcement activity in France, the Netherlands, Brazil, and even China, notes Loughman.

There is more coordinated activity among enforcement officials globally, too. The prosecutor in one country now passes along that suspicious bank account number to his counterpart in another country. “There’s more community being built there,” notes Loughman. It’s much different from 15 to 20 years ago where there were significant barriers — legal and technical — to sharing enforcement information from country to country.

“Now these guys [prosecutors] just call each other on their cell phones,” says Loughman.

Today’s public is “more informed and more indignant” when it comes to bribery and corruption, says Loughman. In India, for example, there is an increased public sensibility regarding corruption “and they want it turned around.”

Third parties

The most common bribery risk that companies face overseas typically involve third parties, notes Loughman: sales agents, customs freight forwarders, influence peddlers, etc. Companies should seek to rationalize their processes in this area. They might ask, for instance: Why do we need fifteen customs freight forwarders in Angola? Why not three, or even one?

In winnowing down the list, companies can ask certain questions: Are they (the third party) part of an international network? (good). Do they have an internal compliance program? (good) Do they use sub-brokers? (bad)

More companies have a centralized process for hiring third parties, but many regional offices still do their own hiring. “That’s where internal audit (IA) can help,” says Loughman. IA can travel to the site, and make clear that the results of the audit receive wide attention within the company.

Take a life sciences company that is selling medical devices in Western Europe, where state-run health systems are often the norm. That means the head of surgery that your sales rep, Suzie, takes out to dinner could be a government employee—which makes for a potential FCPA risk.

It comes out that Suzie is spending too much money on the dinner. Internal audit flies in, meets with Suzie, “and takes that money back,” says Loughman. That is, Suzie is going to have to pay for that expensive dinner out of her own pocket.

“That [news] goes through the organization in about 10 minutes.” says Loughman. Everyone in the company is now on alert: the organization won’t pay for such excesses.

“It can be an effective management tool,” says Loughman, “one that builds the right mind set.”

UK Bribery Act

Overall, “It [anti-corruption compliance] is a very dynamic area,” Loughman comments. “The big wild card is the UK,” with its new bribery act. Yes, the Serious Fraud Office (SFO), the UK enforcement agency, has had some budgetary problems, and it remains to be seen how enforcement will jibe with the court system, but Loughman believes that “in the UK enforcement is real.” They’ve already generated some fines.

“A lot of people think they’ve perfected the FCPA,” Loughman adds. The UK Bribery Act eliminates the permissibility of facilitating payments, for one thing. It also creates an affirmative defense for businesses implementing “adequate procedures” to prevent bribery, another advance in the view of some.

Global development agencies have also shown a mounting interest in the fight against corruption. They often know the price that developing countries pay for corruption.

Overall, the U.S. no longer stands as the lone enforcer of anti-bribery measures. The FCPA was enacted in the 1970s and, for years, there was nothing in the world like it.

In that sense, says Loughman, “the playing field has leveled.”

For more on Loughman’s book, Bribery & Corruption: Navigating the Global Risks, click here.

— Andrew Singer

(Posted January 31, 2012)

When it comes to company reputation, avoiding scandal and wrongdoing trumps CSR, survey finds

January 18, 2012 -- People are more likely to buy products from an organization with a good reputation than one that is financially successful, with more than half of consumers admitting they are more confident buying products from a company with a ’most admired— standing.

60% of a company—s market value is based in its reputation, according to a global study commissioned by PR Firm Weber Shandwick. This is why a number of companies have increased their efforts to build a good ’company reputation— in the past few years: 6 in 10 executives say they would rather see their company in the news for ’admired standing— than for financial accomplishments.

(Posted January 24, 2012)

Many companies today deliver ethics and compliance training to their employees online. They can learn about the company’s rules and policies while sitting at their office desks. This works well — up to a point.

But what do you do at a company like Ryder System, Inc. (Miami), the transportation and logistics company—best known for its fleet of rental trucks—whose 25,000-plus work force includes many drivers and warehouses workers who do not have easy access to computers. How do you train them?

“It’s always a challenge to come up with a program that reaches everyone,” Celeste Lipworth, Vice President of Global Compliance at Ryder Systems, tells Ethikos.

The solution? Work with what the company already had. Hourly employees at Ryder-- drivers, warehouse employees, etc.--are required to receive a certain amount of safety training every year. This training is provided in the form of web-based modules conducted by a third party.

Employees arrive at designated training centers to take these courses on a regular basis. “We’re now working with this vendor to provide ethics and compliance training in addition to that existing training,” notes Lipworth. The training would consist of 25-minute web-based training modules. Ryder’s Global Compliance team will work closely with this vendor in the development of the new training initiative. “We’re writing the content. I’ve got the first draft right now.”

The timing is right, because, “Our big initiative in this upcoming year is to bring ethics and compliance training to all of our employees on all levels.” More than 6,000 employees at Ryder received online training in 2010.

“A lot of companies in industries like ours are challenged by these issues,” Lipworth tells us. “They have good things, but pushing it out to all levels can be difficult.” And a company-wide overhaul of their systems may not be feasible. “It’s about leveraging those existing functions, and using them to make it work on a larger scale.”

The response so far has been positive.

Ryder’s global compliance program began in 2004-2005 in response to Sarbanes-Oxley legislation. Keeping abreast of the most recent regulatory trends is important to the moving organization, which holds annual risk assessment surveys.

When Lipworth recently assumed her present position, one of her first tasks was an update of the risk assessment program, which she did along with Ryder’s senior vice president of internal audit. They interviewed 100 executives around the world, asking them to identify potential compliance risks. From there, the global compliance program was able to determine what areas to emphasize in their training.

Case in point is the UK Bribery Act, which went into effect in the summer of 2011: “We did make some revisions to our bribery and anti-corruption policies,” says Lipworth—which is not to say Ryder did not have such policies in place. Those policies were updated, however, to include language exclusively pertaining to the Act. “We now include references to the UK Bribery act in our international policy.”

— Alexandra Theodore

The complete article will appear in the upcoming (January/February 2012) print version of Ethikos.

An Argument for an ’FCPA Compliance Defense—

From 2000 to 2003, Lucent Technologies spent more than $10 million for some 1,000 Chinese foreign officials—employees of Chinese state-owned or state-controlled telecommunications enterprises—to travel to the United States and elsewhere, ostensibly to inspect Lucent's factories and to be trained in using Lucent equipment.

Instead the Chinese employees visited “tourist destinations throughout the United States, such as Hawaii, Las Vegas, the Grand Canyon, Niagara Falls, Disney World, Universal Studios, and New York City,” according to the Securities & Exchange Commission (SEC). The trips were little more than payoffs—illegal under the Foreign Corrupt Practices Act (FCPA)—and not surprisingly the SEC filed an enforcement action against Lucent Technologies in 2007.

The Lucent case is one of several reviewed in an upcoming paper in the Wisconsin Law Review in which FCPA Professor Mike Koehler asks, “What If?”

What if there was an “FCPA compliance defense” that better incentivized Lucent to “implement more robust FCPA compliance policies and procedures?” After all, as the SEC noted in 2007, “Lucent’s violations occurred because Lucent failed, for years, to properly train its officers and employees to understand and appreciate the nature and status of its customers in China in the context of the FCPA.”

With an FCPA compliance defense, would Lucent have “properly trained its Chinese employees on the FCPA risks relevant to the Chinese market?” asks Koehler, who admits that “the answer will never be known.” He clearly thinks there’s a reasonable chance that they might have, however.

The current FCPA enforcement environment “does not adequately recognize a company’s good faith commitment to FCPA compliance and does not provide good corporate citizens a sufficient return on their compliance investments,” asserts Koehler, Assistant Professor of Business Law at Butler University, in his paper, “Revisiting a Foreign Corrupt Practices Act Compliance Defense.”

“A company’s pre-existing compliance policies and procedures, and its good faith efforts to comply with the FCPA, should be relevant as a matter of law when a non-executive employee or agent acts contrary to those policies and procedures and in violation of the FCPA,” he argues.

He favors an amendment to the current FCPA in which the Department of Justice (DOJ) “will have the burden of establishing, as an additional element, that the company failed to have policies and procedures reasonably designed to detect and prevent the improper conduct by non-executive employees or agents. Such a compliance defense would not apply to conduct engaged in or condoned by executive officers.”

The Department of Justice opposes an FCPA Compliance Defense at present, he notes, which “contrasts with the growing chorus of former DOJ officials who support a compliance defense.”

Koehler quotes former U.S. Attorney General Michael Mukasey, who in Congressional testimony in June 2011 on behalf of the U.S. Chamber of Commerce, observed:

The absence of a compliance defense, Mukasey added, “tells corporate America, in effect, no compliance effort can be good enough even if you did everything [the DOJ] required, [the DOJ] still retains the right to prosecute purely as a matter of [its] discretion.”

To access the full story, click here.

(Posted January 17, 2012)

Susan Frank runs the global ethics and compliance office at AECOM (Los Angeles), the engineering and project development firm with more than 45,000 employees around the world. She heads a full-time staff of six that includes two certified fraud examiners and an investigations attorney.

If that seems heavy on the investigations side for such a small office—it is. But Frank believes it is a “tremendous” advantage to have the ethics investigations function ‘in house,’ as it is at AECOM.

“You know your people and your company’s culture,” she tells Ethikos. “You’re in a better position to judge what is going on. To judge credibility.”

The outside law firms that corporations often hire to conduct ethics investigations can be “heavy handed,” adopting an overly prosecutorial style at times.

“We treat employees with a lot of respect,” says Frank, a former State Department lawyer. Keeping the function in-house helps ensure that employees just don’t become the law firm’s next prosecution.

Outside law firms can also be expensive. The firm may announce to a company: “We’re running this investigation. We’re sending a team of six lawyers to, say, Greece,” plus a team of three forensic accountants, to review records, interviews, etc.

“We don’t really think we need that at times,” comments Frank.

Frank, vice president and assistant general counsel, came to AECOM in September 2009. She was the firm’s first lawyer in the CECO (chief ethics and compliance officer) slot. AECOM had a good program when she arrived, she recalls, “But they wanted to take it to the next level.” This was something that appealed to her.

Today, AECOM has ethics and compliance (E&C) subcommittees in all geographical areas, regions like Europe, North America, Middle East, Asia, and ANZ (Australia/New Zealand). (About half the company’s employees are based overseas.) Serving on these E&C subcommittees are the operating business’ CEO, chief legal officer, and CFO, among others.

“In our company, we try to engage on the local level,” explains Frank. Much of the E&C training is done online, as with most global companies, but sometimes there is the need to specific training, and that will often be done locally, under purview of subcommittees.

In 2011, AECOM’s E&C efforts were recognized by Ethisphere, which named the firm one of the “world’s most ethical” companies. The company capitalized on the Ethisphere award, building “Global Ethics Week” around it, highlighted by CEO John M. Dionisio and nine other CEOs (also Ethisphere recipients) ringing the bell at the New York Stock Exchange (NYSE) in late September 2011, and discussing “the traits of ethical leaders” during a NYSE panel discussion.

Keith Darcy, Executive Director, Ethics and Compliance Officers Association, conducted an employee webinar on navigating the ethical waters in an age of social media. There were numerous contests and discussions during the week as well. AECOM developed ‘speaking out’ posters that read: “Safeguard our standing as one of the world’s most ethical companies for 2011 by reporting suspected unethical behavior.”

One immediate result: An 8000% increase in hits to the E&C website, Frank told us. This website activity didn’t remain at such an elevated level, not surprisingly, but it has sustained a permanent doubling of site activity (compared with activity before Ethics Week.)

They plan to hold Ethics Week again in 2012—indeed, to make it an annual event.

--Andrew Singer

This story will appear in its entirety in the upcoming print version of Ethikos (January/February 2012).

(Posted January 10, 2012)

In 2011, U.S. enforcement authorities continued their emphasis on prosecuting individuals for Foreign Corrupt Practice Act (FCPA) violations, charging 18 individuals.

However, a number of recent trials have “underlined the difficulty that U.S. enforcement authorities, once in court, have in proving foreign bribery beyond a reasonable doubt,” notes Philip Urofsky, a partner at Shearman & Sterling and head of the law firm’s FCPA and Global Anti-Corruption Practice.

Interestingly, most of the individuals charged in 2011 were foreign nationals, notes Shearman & Sterling in the firm’s FCPA Digest, not U.S. citizens working for U.S. or non-U.S. companies.

“U.S. enforcement officials seem to be saying, ‘Enough is enough,’” Urofsky says. “In the past they have targeted non-US companies and now they are reaching out to charge those companies’ employees, particularly those in jurisdictions that do not appear to be exercising sufficient energy and commitment to enforcing their own laws implementing the OECD Convention.”

Meanwhile, FCPA penalties appear to have remained fairly stable. Since the record-holding $800 million penalty for Siemens in 2008, there has been at least one corporate FCPA case with a penalty of several hundred million dollars per year. Most, however, remain under $20 million.

“It’s more than a numbers game,” Urofsky. “High fines often result directly from high profits. When a company does not make much money as a result of corrupt conduct, the penalties are significantly lower.”

Well-publicized high penalties and resulting high annual totals tend to distract from the reality of what the average company really pays for FCPA violations.

When the highest and lowest “outlier” cases are excluded, the averages-per-year are lower still, according to the semi-annual report, “Recent Trends and Patterns in FCPA Enforcement.” Organizations usually pay from $3 million to $33 million—a number “not inconsequential, but certainly not as severe and extreme as the annual total penalties might suggest,” notes the report.

While the number of FCPA enforcement actions have dropped in this past year —16 cases against companies (not individuals) in 2011, as opposed to the record 20 against companies in 2010—there is no sign of the FCPA slowing in its recent ramped up action against foreign bribery.

2011 also saw the UK Bribery Act come into force. Shearman and Sterling experts note that it is still uncertain how courts will interpret a number of the Act’s anti-bribery provisions. However the director of the Serious Fraud Office (SFO) has indicated that an SFO focus from the outset will be prosecuting non-UK companies with a business presence in the UK in an effort to encourage UK-based companies to increase their anti-bribery efforts by preventing non-UK companies from having an ‘unfair advantage’—that is, being allowed to continue their own misconduct free of penalties. By contrast, U.S. officials under the FCPA have only just recently begun to focus on such cases. This would suggest at least some significant actions under the UK Bribery Act in the next year.

Meanwhile, U.S. officials have begun to provide incentives to better encourage voluntary disclosure and self-reporting from organizations, as evidenced by the Department of Justice’ willingness to sometimes, but not always, grant discounts ranging from 3 percent to 67 percent in cases involving voluntary disclosures and negotiated resolutions.

“The message here has remained generally consistent: companies that make voluntary disclosures and cooperate with the government receive a tangible benefit,” says Dan Newcomb, one of the leaders of Shearman & Sterling’s FCPA practice in New York.

For more, click here.

(Posted January 3, 2012)

The biggest corporate responsibility events of 2011? “Porter and Kramer's piece in the January [2011] issue of the Harvard Business Review on 'Creating Shared Value' has probably done more to get corporate responsibility issues into the boardroom than anything else written this year,” writes the Sustainable Business Forum.

In “Creating Shared Value,” Michael E. Porter and Mark R. Kramer, argue that “Businesses must reconnect company success with social progress,” avoiding that obsession with short-term financial success that took hold of corporations over the past few decades, a sort of “trap,” in their view.

Some companies, “known for their hard-nosed approach to business,” like GE, Google, IBM, Intel, Johnson & Johnson, Nestlé, Unilever, and Wal-Mart, are already doing this-- creating economic value in a way that also creates social value.

For example, “Food companies that traditionally concentrated on taste and quantity to drive more and more consumption are refocusing on the fundamental need for better nutrition. Intel and IBM are both devising ways to help utilities harness digital intelligence in order to economize on power usage. Wells Fargo has developed a line of products and tools that help customers budget, manage credit, and pay down debt.”

The authors outline other opportunities: “The societal benefits of providing appropriate products to lower-income and disadvantaged consumers can be profound, while the profits for companies can be substantial. For example, low-priced cell phones that provide mobile banking services are helping the poor save money securely and transforming the ability of small farmers to produce and market their crops. In Kenya, Vodafone’s M-PESA mobile banking service signed up 10 million customers in three years; the funds it handles now represent 11% of that country’s GDP.”

This is not Corporate Social Responsibility

The authors take pains to separate “creating shared value” (CSV) from corporate social responsibility (CSR). The latter is focused on reputation, they say, and CSR programs have “only a limited connection to the business, making them hard to justify and maintain over the long run.”

CSV, by comparison, is integral to a company’s profitability and competitive position. It “focuses companies on the right kind of profits—profits that create societal benefits rather than diminish them.”

To read part of “Creating Shared Value — registration is required to access the full article — click here

— Andrew Singer

(Posted December 27, 2011)

Many corporations now have ethics “helplines,” a toll free number that employees can call to report wrongdoing, or if they simply have a question—about the company’s ‘gifts’ policy, say.

But some employees still find it daunting to pick up the telephone and call a stranger. Will their call be reported to executives within the company? Will they suffer repercussions?

That’s why it’s helpful to have someone on your ‘team’ to go to with such issues—a colleague right on the factory floor, so to speak.

That’s the thinking behind National Grid’s ethics liaison program. “We want people to come forward,” explains William Holzhauer, U.S. Director of Business Conduct and Ethics of the UK-based energy company. The program, now in its third year, has 40 liaisons—ethics “ambassadors”—in all its business lines. “The whole objective is to embed ethics into the corporate culture.”

Liaisons are selected by senior managers. In general, candidates are middle managers, from all backgrounds and functions—not just ‘legal’ or ‘human resources’ operatives— “go-getters,” respected within the company, people willing to take the initiative. Most have been with the company for some years and have an understanding of organizational vulnerabilities with regard to ethics and compliance.

How does it work? An employee goes to the liaison: “I just don’t understand such and such” regarding a company policy. It could involve the appropriate use of company vehicles, for instance. (National Grid has substantial electric and gas operations in the Northeast United States.) How far can you go to a kid’s baseball game if you’re on call with a company vehicle? The liaison could then bring this question to the attention of the ethics and compliance office. It could be a policy that needs clarification company-wide.

The liaisons do not investigate allegations. That could make for an uncomfortable situation—having to investigate someone within their group. They serve for two year periods. National Grid wants to keep “refreshing” the position. About half are ‘refreshed’ every year.

Because National Grid is based in the UK, the entire company is subject to the UK Bribery Act. Holzhauer used the liaisons when doing risk assessments with regard to bribery in each function and business line. What are the risks of bribery in the procurement process, in project management, in the permitting team? The liaisons also assisted in UK Bribery Act training.

“Even if they leave”—cease to be liaisons—“they still carry forth the message,” says Holzhauer. Eventually they’ll have 400-500 liaisons out there — including current and former liaisons—on the U.S. side of the operation, which has 18,000 employees.

The program will soon be expanded to the UK.

— Andrew Singer

[Read the complete article in the upcoming print version of Ethikos (January/February 2011)].

(Posted December 20, 2011)

December 11, 2011 — According to the survey “Actions and Ethics” conducted by law firm Labaton & Sucharow LLP, one third (34%) of all Americans surveyed reported that they have witnessed or had knowledge of wrongdoing within the work place.

But more than three quarters (78%) said that they would gladly report that wrongdoing if it could be done anonymously, without retaliation, and result in a monetary award—as per the SEC’s new whistleblower program.

“It is disheartening to see that wrongdoing in the workplace continues to be so widespread. However, the findings affirm the need for, and value of, the SEC's Whistleblower Program,” noted Jordan Thomas, partner and head of the Whistleblower Representation Practice at Labaton & Sucharow, and former assistant director in the SEC’s enforcement division where he helped to develop the whistleblower program.

A telephone survey of 1,007 adults in private U.S. households was conducted by ORC International between November 17 and 20. The number who observed wrongdoing fluctuated by region, with 29% of Americans living in the Northeast saying that they had witnessed some form of misconduct, compared with 37% of those living in the West. Similarly, 41% of respondents living in non-metro areas reported having encountered wrongdoing, compared with 32% in metro areas.

Half of those who witnessed wrongdoing had an annual income of $75,000-$100,000, although that number dropped to 29% for respondents with an annual income exceeding $100,000. 37% of White/Caucasian respondents said they have observed or had knowledge of wrongdoing in the workplace, compared with 33% for Black/African-American respondents and 22% for Hispanic respondents.

So having witnessed wrongdoing in the work place, which employees are most likely to act? 78% of respondents admitted that with safeguards to their anonymity, and monetary incentives, they would report wrongdoing: a number that seems to have been reflected in the SEC’s recent report on its program since the enactment of the Dodd-Frank Whistleblower Act.

Of that 78%: Men were found to be just as likely to report wrongdoing as women. Respondents between the ages of 45 and 54 were most willing to report (85%), and those with college degrees were found to be 12% more likely to report than those who had not finished high school. 88% of respondents with an annual household income over $75,000 would report wrongdoing, compared with 78% of those with a household income between $50,000-$75,000.

Knowledge of the SEC whistleblower program may on some level affect the decision to report. Of younger respondents (18 to 34), only 74% said that they would report wrongdoing at work, even if their anonymity would be guaranteed. However, among that same age range, 81% were not aware of the SEC’s Whistleblower Program. By contrast, only 60% of older respondents were unaware of the program.

Similarly, respondents with higher wage earners also reported more knowledge of the program: 43% of respondents with an annual household income over $100,000 said they were aware of the new SEC whistleblower program, while only 26% of those with an annual income below $35,000 were aware of the program.

Awareness of the program varied regionally as well: with 66% of Americans in the South versus 71% of respondents living in the Midwest who were unfamiliar with the program. A similar difference was noted among urban and non-urban Americans, with 67% of metropolitan residents compared with 72% of non-metropolitan residents unfamiliar with the SEC program.

“This [SEC] program, in concert with other regulatory reforms, has the potential to dramatically enhance investor protection and restore public faith in the markets," concluded Thomas.

To see the full results of Labaton & Sucharow’s ‘Ethics and Actions’ Survey, click here [PDF].

(Posted December 13, 2011)

When Debra Kuper arrived at AGCO Corporation in early 2008 as its new vice president, general counsel, and corporate secretary, the company was in trouble.

The Atlanta-based manufacturer of farm equipment had received a subpoena from the federal government in connection with the United Nations’ oil-for-food scandal. The Department of Justice (DOJ) was investigating AGCO and its overseas subsidiaries for corrupt payments and false accounting. A deferred prosecution agreement (DPA), or worse, was looming.

Kuper had come to AGCO from Caterpillar, Inc., where she was senior corporate counsel, overseeing the Peoria, IL-based company’s corporate governance, securities, tax and regulatory compliance group. At the time of her job interview, AGCO couldn’t disclose much of where things stood with regard to the scandal because it was still talking to DOJ.

She had to delve into what happened immediately.

Technically, the company was being investigated for its inaccurate books and records. Kuper conducted her own mini-audit, working closely with AGCO’s internal audit department. She soon recognized that there were significant “gaps” in the company’s anti-corruption processes.

A deferred prosecution agreement

In September 2009, Kuper, on behalf of AGCO Corporation, signed a deferred prosecution agreement with the U.S. Department of Justice “relating to illegal conduct committed by the AGCO Subsidiaries” in connection with the company’s U.N. oil-for-food contracts. Among other things, AGCO agreed to pay the U.S. Treasury a monetary penalty of $1.6 million. AGCO later settled a related Securities and Exchange Commission (SEC) enforcement action by agreeing to pay a $2.4 million civil penalty.

The government sometimes appoints a monitor in DPA cases with ongoing supervisory responsibility over the entire firm—other times just to supervise its compliance activities. Unlike many of its competitors also caught up in the oil-for-food scandal, AGCO did not end up with a government appointed monitor. Kuper had worked hard for this. She didn’t want the company to have to spend millions of dollars to have someone do what she felt she would be able to do.

It took “a lot of negotiating,” she recalls in a recent interview with Ethikos. She had to convince the government that she had things under control. It didn’t hurt that she had come from Caterpillar, a “squeaky clean” company from an ethics and compliance standpoint. In effect, she told DOJ: “We need to introduce the Caterpillar model,” a model that worked for a global company headquartered in the U.S. “We need to have people in place.”

How did AGCO fare? This past month (November 2011) the company won Corporate Secretary magazine’s Corporate Governance Award 2011 for Best Overall Governance, Compliance and Ethics Program. It was cited in particular for its “industry-leading global anti-corruption program.”

Obviously something worked out okay.

The Caterpillar model

Caterpillar had used Six Sigma, a rigorous and disciplined methodology to ensure quality assurance in developing and managing its ethics and compliance (E&C) program. That company had an organizational structure with a single head of E&C, with regional E&C officers under that chief, and local E&C officers under the regional officers...

— Andrew Singer

[The continuation of this article will appear in the upcoming print edition of Ethikos.]

(Posted December 6, 2011)

When it comes to ethics and compliance, software giant CA Technologies prides itself on its strong in-house education program. But in the spring of 2009 something was missing. “A lot of our training relied on third party course modules. But this was, and I hate to say it, a little canned,” Joel Katz, the firm’s chief ethics and compliance officer, tells Ethikos.

Employees were just not engaged.

Katz estimates that each CA employee undergoes approximately two hours of required online ethics and compliance training each year. Employees are required to keep up-to-date with codes of conduct and company policy.

So how best to keep CA Technologies' 14,000 tech-savvy employees interested in topics that were serious, complicated, and deeply important?

Katz turned to humor.

In the summer of 2009 Katz attended a conference which featured a presentation by the improv theater troupe The Second City, showcasing a series of videos called ‘RealBiz Shorts,’ a series of humorous scenarios that highlight ethics and compliance issues.

“They were short, interesting, and entertaining,” recalls Katz.

RealBiz Shorts was produced by The Second City in partnership with Corpedia. The Second City, a Chicago-based group with a focus on providing funny and entertaining training videos (see “Improv Theatre and Ethics? U.S. Foodservice Delivers Some Laughs,” Ethikos, September/October 2009), made available RealBiz Shorts a little over a year ago. The idea was to provide organizations with fun videos that could be used for an array of training supplements specifically tailored to ethics and compliance issues. Topics include issues such as social media policies, conflicts of interest, and potential FCPA (Foreign Corrupt Practices Act) violations. In short: serious issues addressed in a way that make employees laugh.

“Compliance is a very serious topic, there is no getting around it. But we don’t want employees to be afraid of it,” says Katz. “We want them to ask questions. The shorts are a good way to break the ice a little. We want them to relax a little and talk to us.”

— Alexandra Theodore

[A longer version of this article will appear in the upcoming print edition of Ethikos.]

A Few Stats from SEC’s Whistleblower Office

How is the SEC’s whistleblower program faring? In its first seven weeks of operation—from August 12, 2011 through September 30, 2011—the Commission received 334 whistleblower tips.

The most common complaints? &ssquo;Market manipulation’ (16.2%) was first, followed by ‘corporate disclosures and financial statements’ (15.3%), and ‘offering fraud’ (15.6%). ‘Insider trading’ and ‘FCPA’ were further back, at 7.5 percent and 3.9 percent, respectively.

The real leader, however, was ‘other’—accounting for 23.7 percent of all complaints—a category for “those instances when the whistleblower chose not to use one of the predefined complaint categories in the online questionnaire,” according to the Commission’s fiscal 2011 report released this month.

The Commission received whistleblower submissions from individuals in 37 states—California (34) and New York (24) headed the list--as well as foreign countries, including China (10) and the United Kingdom (9) with Australia (3) a distant third.

By way of background, Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) directed the SEC to make monetary awards “to eligible individuals who voluntarily provide original information that leads to successful Commission enforcement actions resulting in the imposition of monetary sanctions over $1,000,000,” and certain other successful actions.

Awards were to be made in the amount of 10% to 30% of the monetary sanctions collected.

The act also directed the SEC to establish a separate office to administer the whistleblower program, the Office of the Whistleblower, which is required to report annually to Congress on its activities. Hence the November report. (The federal government’s fiscal year ends September 30.)

In February 18, 2011, Sean X. McKessy was selected to head the Office of the Whistleblower (part of the SEC’s Division of Enforcement). In addition to McKessy, the office at present has five attorneys and one senior paralegal on detail from various commission divisions and offices. The Office is in the process of recruiting and hiring a deputy chief, noted the report.

Among its activities, the Office established a whistleblower hotline for members of the public to call with questions about the program. Office of the Whistleblower attorneys return calls within 24 business hours, according to the report. Since the hotline was established in May 2011, the Office has returned more than 900 phone calls from members of the public

“It is too early to identify any specific trends or conclusions from the [whistleblower] data collected to date,” said the Commission, given the late start of the program. For much the same reason, the SEC did not pay any whistleblower awards during fiscal year 2011. More trends and awards data are expected in 2012.

For the full SEC report, click here.

(Posted November 21, 2011)

If you want to spread the ethics message within a large organization, there’s much to be said for live appearances.

At Walgreens (Deerfield, IL), the giant drug store chain, Chief Compliance Officer Laura Merten and staff spend much time conducting “outreach,” fanning out across the country to meet ‘live’ with employees and managers.

“Face to face conversations are very important,” Merten tells Ethikos. “There is still something about being able to look someone in the eye.”

They recently visited Walgreens stores in Maine and Louisiana (New Orleans) spreading the word.

They attended a company meeting in Las Vegas.

More recently they journeyed to Puerto Rico, addressing a meeting of Walgreens’ Florida and Puerto Rican managers (“I often go where there is a meeting already”). They met informally with locally based employees, i.e., in the Walgreens’ Puerto Rican drug stores. Later they attended the manager meeting where they made a formal presentation.

“If they’ve seen you, even just a picture of you, it puts a face to the name,” says Merten. “It matters. It all feels more human. They know that I am a person,” not just a name or a disembodied voice.

Walgreens, like some other companies, has been working lately at building a ‘speak-up culture,’ that is, reinforcing a sense of duty among employees to report improper conduct. Merten spoke on this subject at the ECOA’s recent (September 22, 2011) annual ethics and compliance conference.

[The full version of this article will appear in the upcoming print edition of Ethikos.]

— Andrew Singer

(Posted November 15, 2011)

Companies from Russia and China are viewed as the most likely to pay bribes—to both public officials and other private firms—according to Transparency International’s (TI) 2011 Bribe Payer’s Index. Companies from countries that take stronger regulatory action against foreign bribery like the U.S. and U.K. are seen as less likely to do so.

While no country among the 28 ranked scored a perfect ‘10’ (i.e. wholly clean and uncorrupt), companies in The Netherlands and Switzerland were deemed least likely to pay foreign bribes, with Belgium, Germany and Japan following closely. (TI surveys gauge respondents’ perceptions of bribery, not actual cases of bribery—a distinction that is sometimes lost.) The U.S. and U.K. were in the top ten too.

Among business sectors, agriculture and light manufacturing are viewed the least likely to participate in foreign bribery, while construction companies seeking public works contracts were deemed most likely to pay bribes to foreign officials.

“The link between a government’s fight against corruption at home and foreign bribery by its companies is made apparent by the strong correlation between Transparency International’s Bribe Payers Index and Corruption Perceptions Index, which measures the levels of perceived corruption in the public sector,” notes the Index, suggesting that overall perception of a country’s anti-bribery reputation is dependent on its government’s perceived ability to enforce anti-bribery measures.

While the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Anti-bribery Convention) requires that each of the 34 OECD member countries, plus Argentina, Brazil, Bulgaria and South Africa, which have adopted this convention too, make foreign bribery a crime, 21 of these countries have made little or no effort to enforce the convention.

Furthermore the OECD does not cover instances of ‘private-to-private’ bribery—that is, a business soliciting or paying bribes to another company rather than a public official.

The Index singles out private-to-private bribery as a growing global concern. The 3,016 business executives from 30 countries that TI surveyed considered instances of this form of bribery as likely to occur as the bribery of a public official. (The OECD does not require its signatories to criminalize private-to-private bribery offense. However, the UK Bribery Act does make bribes between companies a violation.)

The Index cites Russia and China as areas of concern. Both are viewed as powerful emerging markets and both are also viewed as poorly regulated, corrupt economies that have only just recently begun to take measures to enforce anti-corruption measures.

In 2011, China’s parliament passed the eighth amendment to the Criminal Law of the People’s Republic of China making it a criminal offense for Chinese companies and nationals to bribe foreign government officials (previously, the country’s anti-corruption efforts focused only on domestic bribery; it was criminal only to bribe Chinese government officials). The new law applies to companies organized under Chinese law, which include international companies’ representative offices, joint ventures and wholly foreign-owned enterprises in China, as well as Chinese companies overseas.

“The new amendment of the penal code marks the Chinese authority’s commitment to combating corruption,” notes Ren Jiamin, Vice Chair of Transparency International China’s Anti-Corruption and Governance Research Center. “However, there are tremendous challenges ahead and bottlenecks that need to be cleared. Not only does the appropriate legislation need to be put in place, but effective implementation of this provision also requires sufficient enforcement processes and resources, international cooperation and moreover, the continued willingness of the authorities to treat this issue as an important priority.”

The Index notes similar efforts on the Russian front where recent legislation also criminalized some instances of foreign bribery. Russia was invited to join the OECD Convention in May 2011, although experts remain cautious about the country’s commitment to better regulation.

“The position of Russian business in the 2011 Bribe Payers Index is not of any surprise since Russia in general is still struggling to find the proper way to confront systemic corruption. It would be strange to expect business to do better than public office does,” says Elena Panfilova, Director of Transparency International Russia’s Center for Anti-Corruption, Research, and Initiative. “But there is hope that the strict enforcement of new national anti-corruption legislation and compliance with international commitments will help to change this situation in the coming years.”

For the full Transparency International report, click here.

— Alexandra Theodore

(Posted November 8, 2011)

October 31, 2011 -- On November 1, 1991, the US Sentencing Commission implemented the Federal Sentencing Guidelines for Organizations (FSGO), which created incentives for companies to self-police organizational wrongdoing. These guidelines sparked an explosion in corporate ethics and compliance programs.

Twenty years later, how are they doing? Although the Guidelines have achieved “significant successes,” according to the Ethics Resource Center (ERC) in a recent report, challenges remain.

Few FSGO cases involve large companies, for instance, “because criminal cases are largely being detoured around the judges for whom the Sentencing Guidelines were intended,” notes the report. Prosecutors are resolving cases involving wrongdoing by big corporations through deferred prosecution agreements, for instance—and in these cases there is no conviction so there is no sentence where the ‘Guidelines’ can kick in.

There is also inconsistency in how federal agencies determine whether a company has an effective compliance/ethics program—which makes the firm eligible for a reduction in penalties. There are some 20 agencies that play a role in enforcing the laws that govern corporate conduct, notes the ERC, “but each has its own approach to corporate compliance/ethics programs.”

The report makes a number of recommendations, among them that the Department of Justice develop a credible process for evaluating the effectiveness of compliance and ethics programs. “The Department should provide training to DOJ personnel on compliance/ethics best practices.”

The report also calls on The President and Congress to create a Core Federal Model for corporate compliance/ethics programs and on the private sector to demand that ethics/compliance programs “go beyond mere compliance and insist on ‘living, breathing, practical programs’ that focus on the broad goal of building a strong ethical culture.”

Back in 1991 the Guidelines embraced a “carrot and stick” approach for assessing corporate culpability, notes the report—actually a ‘discussion draft,’ titled The Federal Sentencing Guidelines for Organizations at Twenty Years: A Call to Action for More Effective Promotion and Recognition of Effective Compliance and Ethics Programs". It offered a “sharp reduction in penalties when an effective compliance and ethics program (ECEP) was in place ‘to prevent and detect violations of the law.’”

But clearly, in the ERC’s view, more needs to be done.

The report is to be reviewed this month by 22 distinguished former law enforcement officials, federal judges, prosecutors, academics, and compliance/ethics experts. The draft was posted online today (November 1, 2011) for a public comment period starting “exactly 20 years after the FSGO were promulgated.” The review period will end November 30, 2011.

Co-chairs of the advisory group are Patricia Harned, President, Ethics Resource Center, and Win Swenson, Partner, Compliance Systems Legal Group, and former Deputy General Counsel, U.S. Sentencing Commission. Among advisory group members are:

Larry Thompson, Retired General Counsel, Pepsico, Inc. and former Deputy Attorney General, U.S. Department of Justice.

Judge Diana Murphy, U.S. Court of Appeals for the Eighth Circuit and formerly Chair, U.S. Sentencing Commission.

Paul McNulty, Partner, Baker & McKenzie, LLP and former Deputy Attorney General, U.S. Department of Justice.

Michael Oxley, Partner, Baker Hostetler; formerly Member of Congress (R-OH).

Judge Sven Holmes, Vice Chairman - Legal Risk & Regulatory and Chief Legal Officer, KPMG; former U.S. District Judge.

Ben Heineman, Jr., Senior fellow at Harvard Law School and Harvard Kennedy School; former S.V.P. for Law and Public Affairs, General Electric.

Nancy Higgins, Vice President & Chief Ethics and Compliance Officer, Bechtel Corporation.

To access the ERC draft report, click here.

(Posted November 1, 2011)

Companies Still Unprepared for FCPA, UK Bribery Act—Kroll Study

When it comes to issues of global fraud, the greatest new risk may be internal. “We pay a lot of close attention to protecting the business and enterprise from fraud on the outside, but we let our guard inside when in fact there are things that can be done on the inside,” David Holley, Senior Managing Director at Kroll, told Ethikos this week.

According to Kroll”s recently published 2011 Global Fraud Survey, “fraud remains predominantly an inside job.” The study reports that 60% of frauds are committed by insiders, up from 55% last year.

(Posted October 25, 2011)

Out of 61 individuals who were the subject of government-initiated civil or criminal actions alleging Foreign Corrupt Practices Act (FCPA) violations in the past six years, the majority were president, CEO, or chief operating officer of their respective companies, according to a recent Chadbourne and Parke LLP Compliance Quarterly report.

The largest region of alleged misconduct was Mexico, Central, and South America, accounting for 44% of cases, followed by Asia (32%), Africa (21%), and Europe (3%).

Improper payments between $1 million and $2.5 million was the most common range in the cases examined; the higher the payment amount, the greater the likelihood of a criminal case being leveled against an individual, as opposed to a civil case, the study noted.

“It is becoming clear that FCPA enforcement is not just limited to companies that fail to maintain the highest ethical and anti-corruption standards but to its executive management as well,” commented M. Scott Peeler, the report’s author.

Among the 61 targeted individuals (who worked for 26 different companies), 22 were president, CEO or COO of their companies, 8 were vice-presidents, 7 were heads of sales, 5 were regional sales managers, 5 were third party agents, and 4 were CFOs, according to the report, “A Study of Individual Liability under the Foreign Corrupt Practices Act.”

Beyond the size of the improper payments, the degree to which the individual was directly involved in the wrongdoing also factors into whether or not the action pursued is a civil or criminal case.

Someone who knew or participated in a bribe scheme is more likely to be charged in a criminal case no matter the amount paid. Even individuals with direct knowledge who did not act—that is, those who were informed of the improper payments but took no immediate action—are likely to face criminal action.

Those who were not expressly aware of the wrongdoing are still liable to face civil action if there is enough evidence to suggest “that they were aware of circumstances that would lead a reasonable person to suspect impropriety and investigate,” said the report. The factors considered in these cases are whether or not they raised questions and took measures to uncover the potential bribery.

There appears no letting up on the part of the government in going after individuals in such cases (as opposed to corporate entities). “As the recent guilty verdicts in the Lindsey Manufacturing case illustrate all too well, the U.S. government is actively pursuing cases against individual corporate officers and executives who either suspected impropriety but failed to investigate or in the worst cases, knew and actually actively participated in the misconduct,” writes Peeler, a Chadbourne & Parke partner who is part of the firm’s commercial litigation and special investigations and government enforcement practice groups.

Corporations need to take counter measures. “Companies must put in place the strictest anti-corruption controls where they are needed most and train and keep training its employees, managers and high risk third party service providers so they fully appreciate the risks of non-compliance, and truly take a zero-tolerance message to heart. The price of not doing so is just too high.”

Individuals, the report concludes, should also be ready to act fast in the face of apparent wrongdoing: “In today’s world of e-mails, whistleblowers, and aggressive government enforcement (including prison sentences on FCPA cases up to 7-8 years so far), you can’t afford to make these same mistakes in judgment. The moment anyone tells you about bribes being paid, don’t do anything that could later look like acquiescence—call a lawyer immediately (yes, it’s that serious), get to the bottom of things, and follow their advice!”

For the complete report, click here.

(Posted October 11, 2011)

Ensuring Employees Report Misconduct Internally

Industry data suggest that most employees still want to ’go internal” when they see something wrong, according to Luis Ramos, Chief Executive Officer, The Network, Inc. (Norcross, GA). They prefer to tell a manager, an ethics officer, or a human resources specialist about misconduct rather than go ’outside”—to a government agency like the SEC, say.

There are some practical things corporations can do to ensure that this happens. First, make sure that employees are “keenly aware of [ethics and compliance reporting] programs and that they can access them,” Ramos tells Ethikos. Repetition is critical. “Employees forget if you don”t keep telling them about it.”

(Posted October 4, 2011)

UPS recently became the first US company to have its annual ‘sustainability’ report ‘assured’ (vetted) by a Big Four accounting firm (Deloitte).

U.S. companies have trailed Europe and Asia firms in this area. Only one in eight corporate ESG (environmental, social, and corporate governance) reports is "assured" in the U.S., while one in two reports are assured in Europe, notes Ernst Ligteringen, Chief Executive, Global Reporting Initiative (GRI).

"But the U.S. is catching up," said Ligteringen, speaking yesterday at the CR Commit! Forum 2011 in New York City.

UPS, the shipping company, published its initial sustainability report in 2002, the first in its industry sector, and one of the earliest in the U.S.

It wasn't a crisis—and ethics scandal or an environmental calamity—that moved UPS toward sustainability, noted Steve Leffin, Director of Global Sustainability, another panelist at the conference. UPS is an engineering minded company, and it has long believed that "measurement comes before management.” It's also long been a topic of discussion within the company, where they talk about practical issues like, for example, how to remove pooling water from the roof at headquarters, said Leffin.

In the company’s most recent sustainability report, which covers 2010, the firm tracks things like “CO2 Pounds [emitted] per Available Ton Mile” and “Gallons of Fuel per Ground Package” ( 0.117 gallons in 2010, an improvement over 0.121 gallons per ground package in 2009), as well as more conventional metrics like “2010 charitable contributions.”

UPS recently received a score of 99 out of 100 in the 2011 Carbon Disclosure Project's (CDP) Global 500 “Carbon Disclosure Leadership Index”; it was one of only four companies in the world to receive the highest score from CDP, which tracks corporate greenhouse gas emissions.

UPS believes there is a good financial return when investing in sustainable products and services—although it isn’t always obvious. Just the other day UPS had a conversation with a major client in which they quickly established commonality, recalls Leffin: both organizations believed in transparency, both were committed to sustainability; both had good sustainability "scores." Clearly that helped the vendor/client relationship.

The accounting world is becoming more closely tied to the sustainability movement, noted Ligteringen, and the media has picked up on it: when visiting Google Finance one can now find a “carbon disclosure rating” in the “key stats and ratios” column. Bloomberg’s 300,000 market data terminals now provide corporate information like emissions data, figures on energy consumption, as well as corporate policies and board composition.

"Not disclosing leaves a blank on the Bloomberg data,” notes Ligteringen. “That's a spur toward reporting.”

More of a return

With regard to sustainability reporting there is generally, “much more of a return on doing it, than there has ever been before," noted Michelle Greene, Vice President and Head of Corporate Responsibility, NYSE Euronext, another speaker at the conference.

"Investors care [about sustainability], customers care, employees care." Studies have shown that employees will take less in salary if they believe the company is a responsible corporation. It is changing the way companies think about business strategy, says Greene.

This vetting process isn’t cheap. After all, you’re paying an accounting or auditing firm to vouch for the veracity of your greenhouse gas emissions, water usage, energy consumption—and dozens of other metrics. (“2010 greenhouse gas inventory verified by Société Générale de Surveillance and assured by Deloitte & Touche LLP,” noted UPS in its sustainability report.)

Interestingly, GRI’s own sustainability report—the Netherlands-based organization has established the international format for most sustainability reports—is not audited or “assured,” by an outside firm report because of "budgetary constraints," GRI notes on its website.

Sustainability and ethics

The tone at the New York conference was decidedly upbeat, but during the Opening Keynote session, Ligteringen and several co-panelists were asked a difficult question from the audience.

Rushworth Kidder of the Institute for Global Ethics asked: Again and again, it seems, companies score high in these sustainability measures, but later “hit the skids” in regard to ethics as companies becomes engulfed in some scandal or other. How does that happen?

Companies can express their basic principles, like integrity, in their GRI reporting, answered Ligteringen. Moreover, transparency helps build good relationships with all stakeholders. Ethics is part of sustainability reporting, added Greene.

But more than one attendee felt that somehow something was missing here. As reported in last week’s Ethikos’ news blast, Mike Koehler, a law professor at Butler University in Indiana, has noted that General Electric, HP, AstraZeneca and others have all been among Ethisphere’s “World’s Most Ethical” companies—while settling Foreign Corrupt Practices Act (FCPA) prosecutions or undergoing regulatory investigation.

Ligteringen noted that 80 percent of a company's value these days is made up on things other than physical and financial assets. Trust is very important, in comparison to a generation ago when it was just the opposite: almost all market value was a function of physical and financial assets.

Said Ligteringen: “We need more integrated reporting. We need to have better discussions: To figure out what we want, what we will tolerate. Let's start with an informed discussion.”

GRI now has 4,500 reporters worldwide. Ligteringen noted that 93% of the 1,100 listed companies in Denmark today "choose to report” rather than to explain why they aren’t reporting. 80 percent of the Fortune 100 companies in 2008-2009 produced sustainability reports. Major Asian stock exchanges are explaining to their listed firms the importance of sustainability reporting. "Major companies are now managing suppliers through the sustainability lens," says Ligteringen.

"We're seeing more mainstreaming of sustainability--it's not just social investors," added Greene.

The economic crisis is a "continuing reminder of the importance of transparency," said Ligteringen.

With regard to sustainability reporting: It's no longer a "luxury" that some companies want to do—rather it’s something that they can't "afford not to do."

— Andrew Singer

Still a Rarity: Only 29 ‘Chief Sustainability Officers’ at U.S. Companies

Of the 7,000 publicly U.S. traded companies listed on the NYSE or NASDAQ, only 29 have Chief Sustainability Officers (CSOs), according to a study conducted by The Weinreb Group.

Chief sustainability officers tend to be veteran employees: “On average, CSOs have been with their respective companies for 16 years. Moreover, 86 percent of them were internal hires.”

Of the 25 officers surveyed (the 4 who were newly hired were not included in this list) all had experience in external affairs positions.

Among the new hires, Bea Perez, Coca-Cola’s CSO, served as the Chief Marketing Officer for the beverage company’s North American branch before taking on the position of sustainability. She is also the youngest CSO surveyed, at age 41.

CSO is a relatively new position—the first official Chief Sustainability Officer was DuPont’s Linda Fisher, who was appointed to the position in 2004. Among the 29 listed are UPS’ Scott Wicker, AT&T’s Charlene Lake, Alcoa’s Kevin Anton, and General Mill’s Jerry Lynch.

[The study focused specifically on those “who hold the title ‘Chief Sustainability Officer’ because we assumed that this select group would be at the executive level —close to the CEO, and perhaps on an executive team involved with all corporate strategic decisions—to support our efforts to glean best practices.”]

The study notes that while there are no standard guidelines as to the “scope and authority” of the position, there are a number of qualities held in common among the 29 noted in the survey:

They are often small operations with limited resources—a rough average of 4 employees report directly to the CSO. However the average sustainability program has an overall team of approximately 185 cross-functional staffers.

For many organizations Sustainability programs have been experimental in structure and application.

Scott Wicker told Weinreb: “Sustainability as a function was always there at the company [UPS] but it was very uncoordinated. A few people were pulling data and answering questions on an ad hoc basis.”

In 2006 the shipping company realized the sustainability governance structure needed review. “We needed to evolve to get better. We also knew that we had to include all the departments since sustainability affects everyone.”

In 2007, UPS introduced a new reporting structure that included a sustainability group with a director, vice president, and five other staff. Wicker was vice-president, reporting directly to Bob Stoffel, UPS’ SVP for supply chain, strategy, engineering and sustainability. Upon Stoffel’s retirement, it was concluded that it “needed to be clear” who was in charge of sustainability for the company, and Wicker was named CSO.

In the case of AT&T, the sustainability program grew out of a public affairs initiative: “I was asked to start a public affairs program,” Charlene Lake told Weinreb. “Then I acquired the philanthropic and volunteering efforts, and went on to build out an advocacy function for the company.” The sustainability program was established formally in 2007. “Not only did the board receive our proposal well, they also included a new corporate citizenship charter in their existing public affairs committee.”

The study concluded there is no uniform background for a CSO, and no exact mandate as to what the position entails. There are many things the function share in common in all companies observed, however. All 29 CSOs surveyed have their own budget. However, all do not necessarily control their own profit and loss function. Ninety percent of CSOs are one or two steps from the CEO of their organizations. Ten report directly to the CEO, while 16 report to other C-level positions, the most common being the Chief Operating Officer or Chief Marketing Officer.

One thing agreed upon by the CSOs interviewed is that the major function of a Chief Sustainability Officer is the need to respond quickly to external factors:

“Our role in sustainability is to influence and implement behavioral and operational change,” says Kathrin Winkler, CSO of EMC, “Regardless of whether you call the role chief sustainability officer or something else, our function as executives leading sustainability strategy is that of change agents.”

For the full study, click here.

— Alexandra Theodore

(Posted September 27, 2011)

Although 90 percent of corporate executives say their companies have an anti-corruption policy in place, only 29 percent express confidence in those policy’s abilities to prevent or detect corrupt activities, according to a recent survey conducted by Deloitte LLC.

Larger companies were more likely to perceive corruption risks than smaller firms, according to the Big Four firm’s “Anti-corruption practices survey 2011.” The study stressed the difficulties of establishing an anti-corruption environment when expanding into emerging markets such as Russia, China, India, and Brazil, with China proving the area of greatest concern to over half the executives surveyed.

“Use of third parties” was seen as the leading “source” of corruption risk according to the 276 executives surveyed (52%), but 63 percent of executives at larger companies believed the third parties posed a “significant risk,” compared with only 33 percent of those at smaller companies.

What do companies include in their anti-corruption policies--assuming that they have them? Corrupt behavior typically includes issues of bribery (91 percent), gifts to foreign government officials (85 percent), expenses related to government business/government relations (75 percent), facilitating payments (74 percent), and political contributions (73 percent), among others. However, only 45% treat anti-corruption policies as a stand-alone policy specifically focused on anti-corruption compliance. For the majority the policy is part of a broader code.

Deloitte observed a global increase in anti-corruption regulatory measures generally. It referred to increased Foreign Corrupt Practices Act (FCPA) enforcement in the U.S. and the new UK Bribery Act. Companies with strong anti-corruption compliance programs may stand to benefit under the circumstances.

“According to the DOJ [Department of Justice], companies implementing effective anti-corruption programs are much less likely to incur substantial penalties levied for FCPA violations. In addition, the costs to companies of investigating and defending FCPA allegations can be significant. Investigation costs can often run into the tens of millions of dollars based on the size of the matter,” notes the survey.

However the new UK Bribery Act presents new challenges for companies. It applies to all companies doing business with the UK, and it does not allow for facilitating payments — “which are sometimes referred to as grease payments or expediting payments” — and which are permitted allowed under the FCPA. Tougher regulatory action has already led many organizations to eliminate facilitating payments, the survey notes.

In regard to assessing their exposure to potential risk issues, executives were most likely to rely on internal risk assessments (58 percent) and past experience with corruption issues (51 percent). One-third of executives said their companies relied extensively on industry information or on the ratings of the Transparency International Corruption Perceptions Index, according to Deloitte.

[The Deloitte Forensic Center conducted the survey to assess how companies are managing their efforts to prevent corrupt practices in their operations around the world and ensure compliance with legislative requirements. The survey was conducted online in February and March, 2011.]

More internal audits

The frequency of internal audits is higher in larger companies. “Roughly 80 percent of executives said their company conducted internal audits of its foreign operations to identify potential corrupt activity.” Among executives at larger companies, 87 percent said they conducted such audits, compared with 63 percent of executives from smaller companies.

The large/small firm divide extended into the management of internal anti-corruption compliance programs: “80 percent of executives said their board of directors received updates on the status of their anti-corruption compliance program, and roughly two-thirds said that they received updates annually or more often. However, 32 percent of executives from smaller companies (with less than US$1 billion in annual revenues) said their board of directors did not receive any updates on their compliance programs.”

In addition, smaller companies were also half as likely (15 percent) as larger companies (33 percent) to use software to identify suspicious or anomalous payments that could indicate corrupt activity.

Self reporting

When asked whether or not they believed a peer in their industry (though not necessarily their own company) would report wrongdoing to the DOJ or SEC if uncovered, the response was varied: 36 percent of respondents believed it was very likely that an executive would report such a violation, 39 percent said it was somewhat likely, and 25 percent found it unlikely. Only 27 percent saw significant benefits in self-reporting violations, while an additional 43 percent saw some benefit.

Among the concerns expressed regarding self-reporting of potential wrongdoing was the accuracy of disclosures and of management’s reports, as well as certifications relating to internal control over financial reporting. However Deloitte predicted that with the advent of the Dodd-Frank Whistleblower bounties, unreported violations will likely decrease.

Otherwise, issues the executives surveyed considered of “significant concern” were: testing and monitoring for compliance (33 percent), creating an anti-corruption culture (25 percent), implementing effective training programs (23 percent), and balancing the pressure to achieve results with the requirements of an effective anti-corruption program (22 percent).

Getting anti-corruption houses in order

Commenting on the survey findings, Toby J. F. Bishop, director of the Deloitte Forensic Center, Deloitte Financial Advisory Services LLP, said: "Larger companies have taken the brunt of the enforcement activity so far, partly because they entered emerging markets earlier and, as a result, they have had more time to develop sophisticated anti-corruption compliance programs. However, saying 'we're new to emerging markets' is unlikely to protect smaller companies and their executives from hefty fines and sanctions."

"Regardless of size, it's time for all companies to get their anti-corruption houses in order," said Bill Pollard, a leader in Deloitte's FCPA consulting practice. "As FCPA enforcement continues to rise in frequency and--often--fine amounts, enforcement of the UK Bribery Act is underway and SEC whistleblower provisions for Dodd-Frank are in effect, every company should be taking a very hard look at their anti-corruption policies and implementing updates as necessary."

The full Deloitte survey may be viewed here

— Alexandra Theodore

(Posted September 20, 2011)

Female employees often exhibit a stricter ethical standard than men. Indeed, in a survey of 791 British full-time employees, “For seven of ten workplace behavior practices, women were more likely to consider them unacceptable than men.”

This was one of the many observations recounted in The Institute of Business Ethics’ (IBE) September Business Ethics Briefing, ‘Business Ethics and Board Diversity.’

According to IBE, which urges companies to have more women on corporate boards: “Having a range of viewpoints and perspectives helps to avoid groupthink and is bound to put a company in a better position for understanding the risks and opportunities that it faces.” More women in senior management serve to benefit companies in both a financial and managerial sense.

In its surveys, IBE also found that women and older employees were less likely to be tolerant of unethical workplace practices than male and young employees. The briefing observes that such stricter standards may benefit a boardroom’s overall ethics as well.

“The first of a series of reports by McKinsey & Company entitled Women Matter found that companies with three or more women in senior management positions scored more highly against critical measures of organization excellence than companies with no women at the top,” the briefing notes. “These companies also had better financial performance.”

The overall suggestion is that female board members offer a more versatile approach to company management. “Gender diversity also makes a difference in the boardroom in terms of leadership approach and priorities,” states the briefing, which discusses a number of US surveys suggesting that women in the boardroom often provide different and more varied leadership roles.

Observations include a potential for a ‘more collaborative leadership’ style, a perceived tendency to ask tough questions and demand detailed answers, and a stronger support for general oversight functions (i.e., one particular survey found that female women directors are more likely to join monitoring committees).

All in all, the briefing makes a case for diversity, finding that companies that exercise a more diverse boardroom set a better example for stakeholders and appear to prosper.

“A big part of the reason we want women better represented at leadership levels in business is because they bring a different perspective to the table that could lead to enhanced decision-making, more innovation, and ultimately, higher performing teams,” says PwC’s Global Chairman Dennis M. Nally, “While working across gender would be a key aspect of cultural dexterity, it also applies to working across such dimensions as ethnicity, age, and experience.”

How to better promote diversity in the boardroom remains a challenge. Limiting factors include cultural perceptions of a male-dominated senior management, as well as the continued issue of allowed flexibility for women who might require maternity leave (women are under continued societal pressure to prioritize family over company issues).

As of 2011, only 13.9 percent of FTSE 100 board members are women, up from just 12.9 percent in the previous three years. In the US the percentage of women on top corporate boards has remained at 15 percent for the past five years.

There is some debate as to how to raise that percentage. Norway, France, Spain and Iceland have required companies to meet quotas in their hiring practices, with Norway’s quota being the highest at 40%.

The CBI, the UK's top business lobbying organization, does not recommend quotas for hiring of senior management at this time, but rather adopts a ‘comply or explain’ approach to the issue. However, one of the proposed changes to the UK Corporate Governance Code would require companies to publish their policy on board diversity and report annually on the topic.

For more information, click here to download the full briefing in PDF format.

— Alexandra Theodore

(Posted September 6, 2011)

The Dow Jones Sustainability Index (DJSI) has released its 2011 annual report, marking a year of some surprising change: Medtronic, Woolworths, Xerox, and Hyundai are among this year’s most notable additions. Among organizations removed from this year’s list: Microsoft, Coca-Cola, Hewlett-Packard, and Volkswagen.

DJSI does not publicly disclose why companies are dropped or added. The results are shared only with those companies. In the case of Hewlett-Packard, however, the reasons for removal might seem evident in light of recent controversy sparked by the abrupt departure of CEO Mark V. Hurd. This prompted an SEC inquiry and a series of personnel changes that brought the company’s board conduct into question.

Coca-Cola, by comparison, appears to have been dropped simply because it was out-performed by archrival Pepsi in the Food & Beverages sector.

One noted subtraction from regional indexes specific to the Asia-Pacific region was the Tokyo Electric Power Company (TEPCO). In May, DJSI broke precedence and issued a press release explaining why the energy company was reevaluated:

“The review of TEPCO’s position in the regional indexes was prompted by the nuclear emergency at its Fukushima Daiichi power station following the earthquake and subsequent tsunami that occurred on March 11th, 2011,” stated the DJSI release. “The analysis initiated a significant reduction in TEPCO’s sustainability score due to a negative impact in multiple areas such as: Environmental Management Systems and Occupational Health & Safety.” TEPCO had been regularly placed in the regional indexes since 2009.

The Dow Jones Sustainability Index, in conjunction with the Swiss investment boutique SAM, scores an organization based on a number of contributing factors, such as areas of corporate governance (i.e. board effectiveness, board compensation, entrenchment policies, board diversity), risk management (existing strategy and review procedures), and compliance (codes of conduct, means of reporting, and existing anti-corruption measures). Also considered are an organization’s performance in the aforementioned areas of environmental management systems and occupational health & safety. Employee satisfaction and retention, and corporate citizenship are also factors that go into an organization’s score in the Index.

The Index also bars certain sectors from the ranking: organizations dealing in armaments, alcohol, tobacco, and adult entertainment are excluded from all rankings.

In total, 41 companies were added to the global index while 23 firms were removed. According to Michael Baldinger, CEO of SAM, “In spite of the current economic turmoil, it’s clear that sustainability remains a high priority on corporate and investor agendas.”

Among the 143 companies named to the Index is Delta Airlines, which attributed its improved score to environmental factors, among other things: the airline company reduced carbon dioxide emissions 20% since 2005, and has donated extensively civic causes, said Delta in a press release.

For more about the Index, click here.

(Posted September 6, 2011)

Employees in the U.S., Europe, and Japan are in agreement: There are basic standards of conduct that companies should follow worldwide. But actually meeting those standards will require new approaches to managing business conduct, conclude three Harvard Business School professors in an article in this month’s Harvard Business Review (HBR), “A Global Leader’s Guide to Managing Business Conduct.”

Companies should combat bribery in countries where corruption is rampant, most employees agree. “Instructing employees to ‘just say no’ and punishing violators might work,” write authors Lynn S. Paine, Rohit Deshpandé, and Joshua D. Margolis—but it carries a business risk and may simply drive corruption underground.

“A more promising approach recognizes that the best protection against corruption is a superior product that adds value for the customer and is not readily available elsewhere,” they write in HBR’s September 2011 online edition. There isn’t much evidence that many companies have acted on this yet, however. Doing so may require extensive changes in internal processes, as well as engaging with external parties “such as standard setters, regulatory officials, and anti-corruption groups.”

In surveys of more than 6,200 employees from the top ranks to the front lines of four leading multinationals based in the U.S., Europe, and Japan, “We found a surprising consensus on the standards of conduct that these employees think companies should follow but much less consensus on what they believe their companies actually do,” co-author Paine told us.

There is strong global support for even items that the authors thought would be controversial, such as respecting dignity and human rights. “But the gap between ‘should’ and ‘do’ was troubling.” The gap was particularly large with regard to standards of business integrity, such as fair dealing, promise keeping, and conflict-of-interest disclosure.

Top managers typically had a rosier view of matters (i.e., they saw a smaller gap between ‘do’ and ‘should’) than rank-and-file employees. In addition, employees in the emerging markets of China, India, Brazil, and Southeast Asia reported larger gaps than those in the U.S., the U.K., Europe, and Japan.

The authors urge executives who are serious about business conduct to move away from a “legalistic mentality” marked by “binary categories,” such as “ethical versus unethical, compliant versus non-compliant, legal versus illegal—that leave little room for degrees of performance or gradual improvement.” Rather business leaders should embrace a view of business conduct that is “broad, dynamic, and affirmative”—like helping employees develop skills and knowledge, or cooperating with others to eliminate bribery and corruption.

Overall, write the authors, “The compliance and ethics programs of most companies today fall short of addressing multinationals’ basic responsibilities—such as developing their people or delivering high-quality products—let alone such vexing issues as how to stay competitive in markets where rivals follow different rules.”

The article can be accessed for a limited period of time free of charge through the Harvard Business Review at the following link: http://hbr.org/2011/09/a-global-leaders-guide-to-managing-business-conduct/ar/1

— Andrew Singer

(Posted August 30, 2011)

August 22, 2011 -- The layout of a company’s work space may have a strong influence on employee misconduct, with an open workspace environment promoting more ethical and transparent behavior, according to a survey conducted by Ethisphere and Jones Lang LaSalle

“The separation of staff in cubes vs. staff in offices unfortunately contributes to an ‘us vs. them’ atmosphere,” explains one respondent. “The general feeling of those of us in the cubes is that those in offices seem to be allowed to ‘get away with’ much more.”

60% of respondents surveyed believed that open workspaces where employees can see one another promote a more ethical environment. That is, employees are more inclined to act ethically when their actions are easily visible to their coworkers. This may be accomplished by the removal of office partitions completely, lowering the average height of cubicle walls, or the establishment of open common areas for meetings to take place. 64% of respondents reported no visible ethics violations committed in their open working areas within the past two years.

“I believe that people follow policies and procedures more routinely when they know there is a great chance that their actions will be seen,” suggests one respondent.

Of those that have, the most common types of misconduct include inappropriate conversations and/or behavior, a misuse of company assets and harassment or discrimination.

43% of respondents reported non-visible ethics violations: mainly expense fraud and misuse of company. This suggests that employees are more likely to commit misconduct in an isolated environment, separate from their coworkers. Interestingly, only 11% of respondents reported misconduct from employees who worked at home.

Companies that employ an open workspace model also report an improvement in general conduct. Employees are more likely to be polite to one another and less likely to use offensive language if they are regularly within earshot of their coworkers. Similarly, many reported a greater sense of inclusion in company decisions.

However, there are some downsides to an open model. While one compliance specialist agreed that, “people will be less able to conduct unethical or illegal activities in open spaces [...] the closer proximity to other people also brings stresses that wouldn’t exist where people had a sense of privacy.” The downsides include an increased amount of office noise, and the potential for employees to become more introverted and less likely to voice their individual concerns if faced with constant scrutiny from their coworkers. The report advises companies to take great care in gauging their existing culture if one wishes to establish a more open working area: “A corporate culture that values ethics and transparency will alleviate employee fears of management monitoring and a lack of privacy.”

The report advises companies to take great care in gauging their existing culture if one wishes to establish a more open working area: “A corporate culture that values ethics and transparency will alleviate employee fears of management monitoring and a lack of privacy.”

For more, click here to access the full report.

(Posted August 23, 2011)

Online Monitoring of Job Candidates Raises Disturbing Questions

Many U.S. companies use the Internet to research job candidates, but monitoring firms like Social Intelligence Corp. (Santa Barbara, CA) appear to be taking things to a “new level”—raising disturbing questions about privacy and fairness, a university professor who has studied the issue tells Ethikos.

Social Intelligence provides businesses with archived data from social media sites (e.g., Facebook, Linkedin) for use in the prevention of online damage to their reputations. But such monitoring could create a climate of fear and distrust among employees, explains Diane Swanson, professor of management at Kansas State University.

It also raises questions of fairness. Swanson participated recently in a call-in program on National Public Radio (NPR) on the topic. One caller, a job candidate, reported that a potential employer went back 20 years to find compromising materials that had been posted online. He was denied the job.

It “seems unfair,” Swanson told Ethikos, that the individual would be forever held accountable for a youthful indiscretion; the sort that was common on university campuses in the 1970s, for example. By extension, such a practice, if it became widespread, may deny younger generations the sort of personal experiences and ability to explore and experiment without mortgaging their job futures, a freedom available to earlier generations.

Meanwhile, surveys have shown that most managers like the new monitoring tools (6 of 10 in a Deloitte survey appear to approve of such monitoring), but employees do not — particularly those between 18 and 24 years of age (who arguably have the most incriminating photographs online—e.g., college parties and ill-advised photos uploaded from smart phones).

Monitoring the Internet in connection with hiring is clearly an “emerging issue,” Swanson told us, and a robust public policy debate on the subject is surely “looming in the future.”

In the meantime, if companies are conducting ongoing employee monitoring (not just pre-employment), Swanson recommends that those organizations develop policies and provide expectations of employee's online conduct.

“A company should provide full disclosure of its monitoring practices and the consequences employees would face if they violated stated policy and hurt the business' reputation,” she says in a recent press release. [Click here for the press release.]

Without such full disclosure, employees would operate without the benefit of knowing important rules of conduct —something that could be construed as unfair, a perception that could ultimately hurt productivity and prove detrimental to employee morale.

[A longer article on this subject will appear in the September/October issue of Ethikos]

(Posted August 9, 2011)

Kimberly-Clark Corporation (Dallas), maker of Kleenex tissues and Huggies diapers, draws about one-third of its $20 billion in annual revenues from outside the U.S. and Europe. It has operations in 36 countries, including factories in Russia and China and other countries with relatively high rates of corruption.

Ethikos recently asked Thomas J. Mielke, Kimberly-Clark’s Senior Vice President of Law, Government Affairs, and Chief Compliance Officer, if recent FCPA enforcement actions in the U.S. had raised the stakes for companies like Kimberly-Clark that operate in Russia and China?

“Yes it does.” In Russia, where the company opened a $170 million factory in 2010, Kimberly-Clark has a team of four lawyers, and “compliance is a big part of their agency. We do a lot of training for our entire Russian workplace.” The same applies to China. Both are on the company’s ‘high risk’ list of countries from a compliance standpoint.

Mielke has responsibility for internal audit (IA) at Kimberly-Clark, and IA is “uniquely well suited to focus on corruption” in these high risk countries, in his view. If a country director knows that IA is coming to do an audit, and is also aware that a certain portion of that audit will be focused on corruption, the country manager tends to be more pro-active when it comes to corruption issues, he suggests.

It’s helped, too, that of the last three Kimberly-Clark CEOs, two had professional backgrounds that are somewhat compliance related. One was a lawyer and another was an accountant with an organizational background in internal audit. Those chief executives, not surprisingly, tended to be “very focused on compliance and proper accounting and good controls.”

Not long ago when Kimberly-Clark was building its first plant in Russia, CEO Thomas Falk, in fact, talked specifically about not making any improper payments in Russia. That made a big impression on the company’s Russia-based executives, Mielke recounts, another example how a CEO can make a significant difference when it comes to corporate ethics and compliance.

[See the full story in the upcoming issue of Ethikos]

— Andrew Singer

(Posted July 26, 2011)

July 18, 2011 — While aggressive Foreign Corrupt Practices Act (FCPA) case action continues to be the trend among U.S. enforcement authorities in the first half of 2011, an increased interest in internal corruption within foreign countries may suggest an expansion of the FCPA’s purpose.

Indeed, a recent report published by Shearman and Sterling suggests the FCPA may be growing beyond its original focus on bribery of foreign officials by U.S. companies:

“Over the past year, and even more so in the first part of 2011, the agencies have focused on Chinese companies who have listed in the U.S. and are alleged to have made fraudulent disclosures concerning their financial results. In some cases, it appears that the government has expanded its investigation to include allegations that these companies may have engaged in improper transactions with Chinese officials.”

That is to say, U.S agencies are beginning to zero in on the bribery of Chinese officials by Chinese nationals: domestic corruption, rather than international.

In these cases the only known link to the U.S. is that the company has accessed the U.S. capital markets and was thus an issuer under the U.S. securities laws, including the FCPA.

According to Shearman and Sterling’s July ‘Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act’ digest, of the nine FCPA enforcement actions seen in the first six months of 2011, only two have involved non-U.S. companies. While this is down from last year—in which cases against non-U.S organizations made up 55% of all enforcement actions—the two companies that have come under scrutiny are notable in that both come from countries that have never before been charged under the FCPA: JGC Corp. represents the first instance in which a Japanese company has been charged, and Tenaris S.A. is the first Luxembourg company.

The FCPA, Shearman and Sterling notes, has often targeted non-U.S. companies in countries that are perceived as lacking in regulations to curb foreign bribery. Luxembourg, a European financial center, has not yet brought any enforcement actions under its OECD law, which suggests that the U.S. may have pursued the case for policy reasons.

A similar push seems to be behind the JGC Corp action as well: aside from its partnership in a scandal-tainted joint venture, TSKJ (which also included KBR, Technip, and Snamprogetti), that brought it under fire, the Japanese company has no direct commercial ties to the U.S.

International regulatory actions have become an increased concern around the world, the report adds. In just this past year, Korea and Canada announced their first substantive prosecutions under their OECD laws. Similarly, Russia and China passed overseas bribery laws (with another introduced in the Indian Parliament). However the effectiveness of these measures has yet to be gauged, and Shearman and Sterling suggests that U.S enforcement of foreign bribery cases are not expected to ease any time soon.

For the full digest, download the PDF here.

(Posted July 20, 2011)

It is the job of a strong Chief Ethics and Compliance Officer (CECO) not only to ensure that regulatory standards are met, but also to make sure that an organization sticks to its core values--and fosters an “ethical culture,” says Patrick Gnazzo, former CECO at CA Technologies and earlier, at United Technologies.

Speaking at Bentley College, Gnazzo offered seven steps an organization might take to support and strengthen the position of Chief Ethics and Compliance Officer:

The New York Stock Exchange and the NASDAQ require all of their members to have a code of ethics. They should also require all members to have a CECO to enforce this code of ethics.

Organizations should provide their CECO with a sufficient budget and resources.

The CECO, like the director of internal audit, should report to the board of directors.

The CECO should be included in executive sessions of the board so issues can be raised outside of management, if necessary.

The CECO should make quarterly, in-person reports, particularly to the audit committee of the board.

Hiring/firing for the position should require approval by the board of directors.

The CECO should sit in on organization’s operating, strategic planning, and budget committee meetings

Many organizations create a strong CECO position in the wake of being found guilty of serious criminal violations, often as part of a settlement agreement, continues Gnazzo

However, as time progresses the organization may choose to phase out the position of Chief Compliance Officer, instead assigning the duties of the job to various other departments. Such was what happened at CA Technologies after Gnazzo’s departure.

“A position reporting to two separate functions is the kiss of death,” says Gnazzo. Splitting the duty of compliance between two different departments creates a weaker program with more room to work around it, he observed in his lecture, “The Chief Ethics and compliance Officer: A Test of Endurance,” delivered at Bentley University as part of the Verizon Visiting Professorship in Business Ethics.

“Remember playing off Mom against Dad, and vice versa, in the hope of tripping them up to get what you want?”

Citing his own experience working with CA Technologies, Gnazzo emphasized the importance of retaining the CECO position as its own arm within organization.

“Compliance is an oversight function,” Gnazzo told business students. “The compliance officers should be in a position to give the board of directors, senior management, and the shareholders assurances that each of the organization’s functional areas is complying with the laws and rules they are responsible to manage.”

Nevertheless, Gnazzo notes that the Chief Ethics and Compliance Officer is a position that been sometimes slow to gain purchase in the past twenty years.

There are a number of reasons for this trend, the first being an organization may not see it as a necessary position: “The CEO and senior management do not believe the oversight function is necessary because ‘everybody wants to do the right thing.’ Everyone wants to do the right thing, but everything’s right thing is not the same, and even some right things are really not that important. So why do you need an identified compliance function?”

Another factor for a weak CECO position may be an organizational belief that ‘everybody should be responsible for doing the right thing.’

However it is a lack of understanding as to what compliance entails that serves as the largest hindrance in the institutionalization of the function. The nature of the position is often unclear. “Management and the board of directors do not have a clear understanding of the function’s role in the organization. The main reason for this lack of understanding is that many senior managers and boards have little or no experience with a CECO position or what functions it should be managing.”

Individuals may all wish to ‘do the right thing’, but just what the right thing entails may not always be the same across the board. “Great organizations have published values and sets of high standards," says Gnazzo. "Establishing a culture that makes the organization a positive place in which to work.”

Patrick Gnazzo spoke as a part of the Center for Business Ethics Verizon Visiting Professorship in Business Ethics program. For more information click here.

— Alexandra Theodore

(Posted July 12, 2011)

A recent global study conducted by KPMG has shed an interesting light on the profile of the average employee most likely to commit fraud.

According to the study, based on investigations conducted in 69 countries, the average fraudster is male, found in finance-related positions, is most likely to commit fraud against his own company, and seldom acts alone. The average fraudster has also been found to be an employee who has been with the organization for some time—with 33 percent of recent cases having worked for the organization for more than 10 years, suggesting that these individuals do not join their organizations with the intention to commit fraud.

The report also found that instances of fraud are most likely to occur among senior management. The past three years have also seen an increase in instances of fraud uncovered among members of the board.

“We find the higher the level of executive, the greater the value of the fraud. Greater oversight responsibility often offers greater opportunity for bigger frauds,” says Graham Murphy, head of KPMG’s Forensic Services practice in the U.S. firm’s Midwest region. The suggestion is that in the U.S. in particular the perpetuation of a ‘larger than life’ central management figure is the likely setting for which fraud will occur.

Findings in Switzerland have been similar. “We find that most fraud continues to be committed at senior and middle-management levels,” says Anne van Heerden, head of Forensic at KPMG in Switzerland. “More frequently, collusion with external parties is also evident—notably among suppliers who over charge for their services and give a kick-back to the internal perpetrator.” Family offices have also become a target of fraudsters, although perpetrators are more often employees or outside agents rather than family.

Meanwhile, organizations in Central and Eastern Europe (CEE) went against the common trend with most individuals guilty of fraud coming from sales and procurement. “Lack of trust in local regulatory and judicial systems often results in affording the perpetrators an opportunity to resign without the offense going to court or becoming public,” says Jimmy Helm, KPMG’s Head of Forensics in the CEE. “Consequently HR references are unable to address the disciplinary issues, and poor background checking allows these fraudsters to re-enter the business community.” (For more on fraud in Eastern Europe, click here.)

The survey noted the average time it takes to detect fraud is about five years, with the longest period until detection being found in Asia Pacific organizations. Furthermore, many Asia Pacific organizations are unwilling to pursue legal enforcement when instances of fraud are uncovered. “Enforcement takes up too much time, which companies are unwilling to spend,” says Rohit Mahajan, executive director of KPMG’s Forensic practice in India. “The company’s response depends on its tolerance to fraud and its appetite to deal with legal channels.”

Mahajan does note that in India, where corruption has become a leading political issue, many controls seem to have been strengthened recent years, with most fraud being uncovered by management rather than external investigation or whistleblowers.

While the main motivating factor of fraud remains the desire for personal financial gain, a rising factor has been employees attempted to conceal poor performances (a common theme in cases of misreporting).

The report also highlighted a need for stronger controls in the area of compliance. While organizations may have controls in place to detect and enforce fraud, the report found that in 73 percent of all instances involved fraudsters taking advantage of weak internal systems.

“Organizations need to recognize that fraud does happen,” says Murphy. “With a robust compliance program and protocols for prevention, detection, and response, they will be better able to deal with it and move on.” Murphy also stressed that increased enforcement has led to more cases coming to light.

However, warning signs need to be acted upon. The report found that while in 56 percent of cases, some form of ‘red flag’ behavior was exhibited, it was only ‘acted on’ 6 percent of the time.

Some of the red flags to look out for in potential fraudsters are individuals who take few holidays, exhibit a lifestyle that seems excessive, appear to have overextended personal finances, and do not or will not produce records/information voluntarily or on request.

Organizational trends to look out for are a perceived lack of trust between the organization and internal/external auditors, high staff turnover, and multiple banking arrangements rather than one clear provider.

(Posted July 5, 2011)

When Alcoa opened in Russia in 2005, visibility was counted as among the company’s key strengths.

“It was very questionable whether they would even allow us to buy 100 percent of these facilities. We were going to sell into their aerospace industry. They were going to watch us very closely,” William O’Rourke, then-head of Alcoa Russia, told Julia Taylor Kennedy in the latest of Carnegie Council’s Workshop for Ethics in Business series. “[...] So it was pretty high-level. We felt with that kind of visibility, we could push through corruption and bureaucracy.”

Regarding corruption in Russia -- which ranked 154 out of 178 countries in Transparency International’s 2010 corruption index--one of the top issues was cultural: “Part of the training of the Russian managers is that you have to bring them out of this culture of corruption,” said Thomas Graham, one of the experts Alcoa hired to better understand its Russian audience. Bribery was a day-to-day fact of life. A trip to the doctor, for example, required a bribe. “It's things that you do day in and day out, where what we would consider a bribe is actually very natural to Russians.”

Therefore creating a clear set of rules and regulations, and enforcing them, were deemed vital in creating an ethical environment. Compliance with increasingly strict FCPA regulations and Sarbanes-Oxley legislation was important, too.

“Alcoa has a pretty strict ethics and compliance program. We have the compliance line, a corporate compliance officer, the compliance investigations that go on, et cetera,” O’Rourke tells Kennedy. “We found that the Russians were very reluctant to use the compliance line and to report anything, probably because of the cultural practices of corruption that were there over time.”

However, when those rules and regulations were made readily available to employees, and those rules readily enforced, O’Rourke discovered a gradual improvement in just the first year. In one example, he discusses the instance of an HR manager who was discovered to be extorting laid off employees. The response? Termination of the employee and the establishment of a program which educated employees as to the exact details of their severance packages.

“It helps to set that tone,” says O’Rourke, when asked as to the effectiveness of such terminations. “It helps to let the employees understand what's going to happen, and you let people know that we really do have sanctions. The sanctions are in place and they actually do happen.”

For the full interview and transcript, click here.

—Alexandra Theodore