Expert answer:Need business and finance help with: What’s in a
Answer & Explanation:What’s in a Name of an Ethics Code? (CHAPTER 9 FROM THE TEXT IS ATTACHED)Read Consider: What’s in a Name of an Ethics Code? in Chapter 9, then answer these following questions from the text:How does the title of a company’s ethics document affect your attitude about the content? Is one title more attractive than another?What is the overall message that the title of the code of conduct conveys? Does it reflect the purpose of the document to provide employee guidance on expected conduct?Propose creative titles for ethics codes for a pharmaceutical company and a restaurant. (Gonzalez-Padron, 2015).Look for two other company ethics documents and share the titles of their ethics documents (consider your own organization or one that you are familiar with for this question). 09ch_gonzalez_business.pdf
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9
Implementing an
Ethics Program
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Learning Outcomes
After reading this chapter, you should be able to do the following:
• Explain how an organization can structure and manage an ethics program.
• Develop a code of conduct that articulates standards to company stakeholders.
• Create an ethics training and communications plan.
• Evaluate mechanisms for obtaining advice on ethical issues and reporting ethical misconduct.
• Design an effective monitoring and auditing system.
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Introduction
Introduction
Ethics Program Pays Off for Morgan Stanley
On April 25, 2012, Garth Peterson, former managing director for Morgan Stanley’s real estate
business in China, pleaded guilty to violating the Foreign Corrupt Practices Act (FCPA) and for
conspiring to evade Morgan Stanley’s internal controls for meeting securities laws for investment advisers (United States Department of Justice, 2012). From 2004 to 2007, Peterson
cultivated a relationship with a Chinese official to obtain business approvals. In 2008, executives at Morgan Stanley discovered the violations, reported them to the U.S. Securities and
Exchange Commission (SEC), and fired Peterson (Lucchetti & Kendall, 2012). Department of
Justice officials declined to bring any enforcement action against Morgan Stanley because of
its documented ethics and compliance program, stating:
According to court documents, Morgan Stanley maintained a system of internal
controls meant to ensure accountability for its assets and to prevent employees from offering, promising or paying anything of value to foreign government officials. Morgan Stanley’s internal policies, which were updated regularly to reflect regulatory developments and specific risks, prohibited bribery
and addressed corruption risks associated with the giving of gifts, business
entertainment, travel, lodging, meals, charitable contributions and employment. Morgan Stanley frequently trained its employees on its internal policies,
the FCPA and other anti-corruption laws. Between 2002 and 2008, Morgan
Stanley trained various groups of Asia-based personnel on anti-corruption
policies 54 times. During the same period, Morgan Stanley trained Peterson on
the FCPA seven times and reminded him to comply with the FCPA at least 35
times. Morgan Stanley’s compliance personnel regularly monitored transactions, randomly audited particular employees, transactions and business units,
and tested to identify illicit payments. Moreover, Morgan Stanley conducted
extensive due diligence on all new business partners and imposed stringent
controls on payments made to business partners. (United States Department
of Justice, 2012, para. 6)
The experience of Morgan Stanley shows that companies with excellent ethics and compliance programs may be protected should their employees violate standards. An excellent ethics and compliance program meets five common elements set forth in the U.S. Federal Sentencing Guidelines for Organizations (FSGO), the FCPA, the U.K. Bribery Act 2010, and the
Organisation for Economic Co-operation and Development (OECD) Good Practice Guidance
on Internal Controls, Ethics, and Compliance. Although the language differs, each of the four
guidelines recommends the following steps: 1) create program structure, 2) establish corporate standards, 3) educate the workforce, 4) create investigation procedures, and 5) assess
program effectiveness (see Figure 9.1 for the key elements to implementing an organizational ethics program).
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Section 9.1
Creating a Program Structure
Figure 9.1: Key elements to implementing an organizational ethics program
An excellent ethics and compliance program meets five common elements.
Create Program
Structure
Establish Corporate
Standards
• Ethics Officer
• Board Oversight
• Reporting Relationship
• Code of Conduct
• Global Considerations
• Implementation
Educate the
Workforce
• Training Plan
• Training Execution
Create Investigation
Procedures
Assess Program
Effectiveness
• Ethical Guidance
• Reporting Mechanism
• Investigation Process
• Ethical Performance
Metrics
• Audit Committee
Though prescriptive in the steps needed to create an effective ethics and compliance program,
none of the aforementioned guidelines specifies the method to be used. Rather, each organization may tailor its program to applicable industry practice or standards, the size of the organization, and the risk of misconduct (United States Sentencing Commission, 2013). Ethics
professionals typically share initiatives that work for their company (best practices) so that
other organizations can model their ethics and compliance programs on proven strategies.
This chapter presents practical steps for implementing an effective organizational ethics program. The first step involves creating a structure to manage and oversee the organization’s
ethics and compliance program. This is followed by clear communication of standards of
acceptable behavior that address potential risks for misconduct. The third step is to educate
the workforce via a training program that resonates with the audience and encourages ethical
behavior as the norm. The fourth entails creating procedures to respond to reported misconduct through a transparent and fair investigation process. The final step involves monitoring
and assessing program effectiveness to identify any areas for improvement. The chapter provides best practices as a foundation for an organization to design an ethics and compliance
program that meets its distinct requirements.
9.1 Creating a Program Structure
As demonstrated by the Morgan Stanley example, simply creating an organizational ethics
program is not sufficient for preventing misconduct. To ensure the effective implementation
of an ethics program throughout an organization, a designated individual or group must have
the authority and responsibility to oversee it.
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Creating a Program Structure
Section 9.1
There are three components to an effective ethics program structure. The first is an appointed
ethics officer who oversees compliance with legal and ethical standards and acts as a steward of the ethics and compliance program within the organization (Ethics Resource Center,
2007). The second component is oversight of the ethics and compliance function by the organization’s governing body (e.g., the board of directors). The third is the relationship between
the ethics officer and whomever he or she reports to, which can help or hinder the effectiveness of the ethics and compliance program.
Approaches to managing an organizational ethics program vary. Some companies have a
distinct department for managing the ethics and compliance program, such as the Corporate Office of Ethics and Business Conduct at Lockheed Martin (Lockheed Martin Inc., 2007).
Other companies assign responsibility for ethics and compliance to existing functions, such as
human resources or legal departments. An informal survey by the Ethics & Compliance Officer Association (ECOA) found that less than a third of the companies (31.6%) had a separate
functional area for ethics, whereas almost half (47.4%) included ethics as part of the legal/
general counsel function (Kane, 2014).
Companies gain advantages by structuring ethics and compliance programs appropriately
within the organization. Organizations should consider the following questions when designing an ethics and compliance program:
•
•
•
•
•
How does the ethics and compliance function relate to the business, chief executive
officer (CEO), and top management?
How does the ethics and compliance function relate to functional departments or
divisions of the company?
What should the ethics and compliance relationship be with external stakeholders
(e.g., customers, suppliers, regulators)?
How does the ethics and compliance function relate to the board of directors or
owners?
What should the ethics and compliance function report about and to whom, how,
and when?
The reporting structure must allow the ethics officer to address delicate situations in which
executive management may be involved in wrongdoing. The OECD Good Practice Guidance on
Internal Controls, Ethics, and Compliance recommends that senior corporate officers have a
duty to oversee “ethics and compliance programmes or measures regarding foreign bribery,
including the authority to report matters directly to independent monitoring bodies . . . with
an adequate level of autonomy from management, resources, and authority” (OECD, 2010,
p. 3). The concept of an appropriately designed program suggests that the designated ethics
officer have sufficient authority and responsibility to perform duties to ensure compliance of
legal and ethical standards throughout the organization.
The Role of the Ethics Officer
What are the responsibilities of an ethics officer? The Society for Human Resource Management (SHRM) states that the ethics officer “serves as the organization’s internal control
point for ethics and improprieties, allegations and complaints, and conflicts of interest; and
provides corporate leadership and advice on corporate governance issues” (SHRM, 2014,
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Creating a Program Structure
Section 9.1
para. 1). This description provides the purpose of an ethics officer in general terms, which
may not reflect the breadth of responsibilities for a larger organization. The Ethics Resource
Center (2007), on the other hand, provides an example of a job description for a chief ethics
and compliance officer with responsibilities for the conduct of employees worldwide:
Corporate Officer with responsibility to provide global leadership on compliance and ethics; oversee all compliance and ethics programs and initiatives
of the company; ensure that appropriate programs, procedures and policies
are implemented to reduce the chances of illegal or unethical conduct by the
company. (p. 7)
Regulatory guidelines stipulate that the ethics and compliance function be led by high-level
personnel (United States Sentencing Commission, 2013) or top-level managers (Ministry of
Justice, 2011). Recall in Chapter 1 that there was a shift from a solely compliance focus in
the early 1990s to either a combined compliance/ethics or solely ethics focus in the 2000s.
The managerial level, title, and department name can reflect the organization’s commitment
to the ethics program and its emphasis on ethics versus compliance. For example, the ethics and compliance function at Cisco resides in an ethics office, whereas most ethical issues
at Harley-Davidson are referred to the legal department and the chief compliance officer/
general counsel (Cisco, 2014; Harley-Davidson, n.d.). A study found that a title of chief, such
as chief ethics officer or chief compliance officer, is the most common in larger companies
(28%), followed by vice president (10%), executive vice president or senior vice president
(9%), director (7%), manager (4%), and officer (3%) (Weber & Wasieleski, 2013). See a
sample of titles for the ethics professional in the feature box Consider: What’s in a Name of an
Ethics Professional? to recognize variations in naming ethical departments and the responsible manager.
Consider: What’s in a Name of an Ethics Professional?
A review of the ECOA member listing shows some of the titles that may be used for ethics
professionals:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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Chief compliance officer
Chief ethics and compliance officer
Chief ethics officer
Chief risk, compliance and ethics officer
Vice president, corporate responsibility
Vice president, global compliance and ethics
Director of business conduct
Director of integrity, security and compliance
Director, corporate compliance and ethics
Director, ethics and integrity programs
Director, ethics and regulatory compliance
Senior manager, ethics and non-financial corporate policies and procedures
Senior manager, global ethics and compliance
Senior vice president, global [corporate social responsibility] and risk management
Manager, business integrity and compliance
Manager, ethics and employee issues
(continued)
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Creating a Program Structure
Section 9.1
Consider: What’s in a Name of an Ethics Professional?
(continued)
Questions to Consider
1.
2.
3.
Why does the ethics function vary among organizations? What company factors
would lead to the wording of the ethics function?
Which titles reflect a focus on compliance only? Which titles reflect a focus on ethics?
Does a title provide sufficient authority to oversee an organization’s ethics program?
Does the title of the ethics professional indicate a level of autonomy in addressing
ethical issues?
The diverse titles of ethics professionals imply that the duties of the ethics officer vary among
organizations. The Ethics Resource Center (2007) identifies typical responsibilities of ethics
officers:
•
•
•
•
•
•
•
•
Oversee assessment of organizational risk for misconduct and noncompliance;
Establish organizational objectives for ethics and compliance;
Manage the organization’s entire ethics and compliance program;
Implement initiatives to foster an ethical culture throughout the organization;
Supervise ethics and compliance staff embedded throughout the organization;
Frequently inform the board of directors and senior management team of risks,
incidents, and initiatives driven by the ethics and compliance program, and progress
toward program goals;
Implement a program of measurement to monitor program performance; and
Oversee periodic measurements of program effectiveness. (p. 2)
A key role of the ethics officer is to coordinate the ethics program with other company managers in the areas of human resources, finance, communications, risk management, and governance. Additionally, the ethics officer may communicate regularly with customers, suppliers,
and the media on ethical issues relating to the company or industry. A survey of 800 ethics
and compliance professionals from financial service firms in 62 countries found that the typical week of an ethics officer includes, on average, a little more than a day of addressing regulatory developments, such as tracking and analyzing regulatory developments (15% of time
during the workweek) and amending policies and procedures (7%) (Hammond & Walshe,
2013). Another day involves communicating with the legal department, conducting internal
audit and risk functions (16%), and reporting to the board (6%). During the rest of the week,
the ethics and compliance professionals reported focusing on compliance tasks including
monitoring activities, training, and provision of advice and guidance (56%).
The Ethics Resource Center (2007) has identified 11 qualifications expected from the designated lead of an ethics program. They include:
•
•
•
•
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Substantial business experience (15 years+);
Ability to communicate (public speaking, professional writing, with executives, etc.);
Ability to develop and deliver training;
Familiarity with Sarbanes-Oxley, Federal Sentencing Guidelines [FSGO] and other
relevant compliance standards;
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Section 9.1
Creating a Program Structure
•
•
•
•
•
•
•
Familiarity with leading thinking and research in business ethics and compliance;
Understanding of the auditing process;
Understanding of the risk management/risk assessment process;
Comfort with eLearning, learning management systems, and other IT [information
technology];
Project management skills;
Substantial management experience (10 years+); and
Ability to motivate and inspire people. (p. 26)
As formal ethics and compliance education is only a recent offering in higher education, many
ethics officers come from legal, auditing, or human resources disciplines. Over half of ethics
professionals in vice president or director roles have a law degree, while less than 5% of all
ethics professionals are certified public accountants (Society of Corporate Compliance and
Ethics, 2013). To gain knowledge in ethics and compliance, professionals seek certification
from the ECOA and the Society of Corporate Compliance and Ethics (SCCE). According to an
SCCE survey, the average compensation for ethics professionals ranges from $214,118 for vice
presidents to $71,894 for assistants/specialists, whereas compensation for certified professionals are slightly higher (Society of Corporate Compliance and Ethics, 2013). See Table 9.1
for more detailed information about compensation for ethics professionals.
Table 9.1: Average compensation for ethics professionals
Vice President
Director
Manager
Assistant/
Specialist
Average total
compensation
$214,118
$139,582
$102,324
$71,894
Other certifications*
$170,425
$128,571
$103,376
$69,352
Certified Compliance
& Ethics Professional
from SCCE
No certification
$230,637
$236,479
$166,109
$134,857
$113,875
$93,586
$78,580
$70,904
* Includes industry-specific certifications in healthcare, fraud examination, internal auditing, information systems
Source: Society of Corporate Compliance and Ethics. (2013). 2013 cross-industry compliance & ethics staff survey (pp. 40).
Minneapolis, MN: Society of Corporate Compliance and Ethics.
The relationship of the ethics officer to the governing authority of an organization shifted from
informal or nonexistent to a formal reporting requirement with the enactment of SarbanesOxley (Chapter 4) and similar legislation worldwide, which placed greater responsibility for
accurate financial reporting on the board of directors. The 2004 and 2010 amendments of
the FSGO encourage companies to allow the chief ethics and compliance officer access to the
board of directors to report on observed misconduct. To create an effective program structure, organizations ask, “What is the appropriate involvement of the board of directors in the
ethics and compliance program and what should be the relationship between the board and
the ethics office?” The next section explores these questions.
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Creating a Program Structure
Section 9.1
Board Oversight
Oversight of the ethics program by the governing body of an organization differs from the
daily management by the ethics officer. The role of the board of directors is to monitor
management practices and performance in achieving company goals, as well as to protect
the organization from reputational and financial risks resulting from ethical misconduct.
Board members may be responsible to stockholders for monetary damages if they fail to
set up procedures guarding against misbehavior that results in fines and penalties. Recall
from Chapter 1 how Medicare and Medicaid fraud resulted in scrutiny of the healthcare
industry and the subsequent Caremark decision of 1996 statement that directors have a
duty to assure that accurate information and reporting systems are in place and followed
(Cohan, 2002; Robinson & Pauzé, 1997). The realization that Enron’s board of directors
twice waived its conflict of interest policy for establishing special purpose entities with its
chief financial officer increased regulatory attention to the board’s responsibility to oversee the ethics program (Felo & Solieri, 2003).
The FSGO outlines the responsibilities of the board of directors and senior management relating to ethics and compliance as follows:
•
•
•
The board of directors must be knowledgeable about the organization’s ethics and
compliance program, including information on the compliance risks facing the firm
and the programs installed to combat those risks.
Senior management must ensure that the organization has an effective compliance
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