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How Major Companies Respond to Top-Level Sexual Harassment Allegations: A Toyota Case Study

How companies resolve sexual harassment difficulties and how they publicly communicate their actions is a critical top management issue. Companies are often reluctant to publicly admit wrongdoing or to provide detailed explanations of allegations. They often employ prominent outside public figures to review their procedures in order to lend credibility to their responses. Even here, however, they sometimes turn to people with whom they have long had a relationship, which can yield public skepticism. The recent Toyota situation contains some of these characteristics.

Allegations of sexual harassment in the upper ranks of Toyota Motor North America’s (TMA) management has caused its CEO to resign his position and prompted the company to announce a set of measures to strengthen its “anti-harassment and discrimination” policies and procedures.

Without providing any details of the allegations, TMA issued a press release on May 8, 2006 that prominently noted that it is replacing top executives, launching employee training programs, and creating a “Special Task Force Headed by Former U.S. Secretary of Labor Alexis Herman to Review Its Policies and Practices Against Harassment and Discrimination.”

According to Business Week magazine, as well as other media reports, on May 1, 2006 Sayaka Kobayashi, the former personal assistant for then CEO Hideaki Otaka, filed a law suit against Toyota alleging that Mr. Otaka repeatedly sexually harassed her and that TMA’s management failed to take effective actions to stop the harassment. Indeed, the magazine reported that not only did corporate management ignore her complaints, but also that its general counsel suggested to her that one of her options was to leave the company. The article stated that Toyota replaced Weil Gotshal & Manges, the New York firm that initially advised the company on the matter with another law firm (Weil Gotshal is among the most prominent U.S. law firms advising on corporate governance and business ethics).

According to Ms. Kobayashi’s complaint, for several months she endured the sexual advances of Mr. Otaka. These included inappropriate invitations to lunch, requests that she accompany him on business trips, gifts and flowers, and two forcible attempts to engage her in sexual activity.

TMA’s press release highlights the actions that the company has taken in light of the publicity surrounding the accusations. It noticeably described the special role that Alexis Herman will play in a review of the situation. However, it also quoted Ms. Herman as being positive about the ethics practices at Toyota. She said, “As Chair of the Toyota Diversity Advisory Board since 2002, I've seen first-hand the company's progress in the area of diversity and commitment to treating employees with dignity and respect.”

According to the press release, the task force will “undertake a thorough review to ensure that Toyota's policies, procedures and actions regarding harassment and discrimination are in keeping with best practices.”

Other actions that TMA is taking, include:

- The initiation of a supplemental executive training program which will enable executives to better recognize, prevent and handle any instances of inappropriate behavior.

- As current company policy requires that any allegation of harassment or misconduct be immediately investigated and reported to the executive's superior, the clarification by each Toyota affiliate of its procedures to provide that if the Chairman, CEO or President is involved in an allegation, a report will be made directly to that executive's Board of Directors.

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Fannie Mae Update:
OFHEO Report Blames Board and Executives for Unethical Corporate Culture, Makes Key Recommendations

Two major reports on alleged auditing irregularities at Fannie Mae highlight critical issues for reform. The first report here is from US government authorities. The second report (below) is by an independent expert group headed by former US Senator Warren Rudman.

On May 23, 2006 Fannie Mae reported that it had reached a settlement with US federal regulators under which it will pay a fine of about $400 million for allegedly manipulating accounting rules in ways that helped increase bonuses for executives. It also announced it will comply with recommendations from a report by the Office of Federal Housing Enterprise Oversight (OFHEO) that largely blamed Fannie Mae’s board and executives for fostering a culture that allowed managers to act illegally and manipulate earnings.

According to James B. Lockhart, Acting Director of OFHEO, “The image of Fannie Mae as one of the lowest-risk and ‘best in class’ institutions was a façade. Our examination found an environment where the ends justified the means. Senior management manipulated accounting; reaped maximum, undeserved bonuses; and prevented the rest of the world from knowing. They co-opted their internal auditors. They stonewalled OFHEO…The combination of earnings manipulation, mismanagement and unconstrained growth resulted in an estimated $10.6 billion of losses, well over a billion dollars in expenses to fix the problems, and ill-gotten bonuses in the hundreds of millions of dollars.”

The OFHEO report is the product of more than two years of in-depth review involving nearly 8 million pages of documents. The following are some of the key findings and recommendations of the report:


-Fannie Mae senior management promoted an image of the Enterprise as one of the lowest-risk financial institutions in the world and as “best in class” in terms of risk management, financial reporting, internal control, and corporate governance. The findings in this report show that image was false.

-A large number of Fannie Mae’s accounting policies and practices did not comply with Generally Accepted Accounting Principles (GAAP). The Enterprise also had serious problems of internal control, financial reporting, and corporate governance. Those errors resulted in Fannie Mae overstating reported income and capital by a currently estimated $10.6 billion.

-During the period covered by this report—1998 to mid-2004—Fannie Mae reported extremely smooth profit growth and hit announced targets for earnings per share precisely each quarter. Those achievements were illusions deliberately and systematically created by the Enterprise’s senior management with the aid of inappropriate accounting and improper earnings management.

-By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders. Earnings management made a significant contribution to the compensation of Fannie Mae Chairman and CEO Franklin Raines, which totaled over $90 million from 1998 through 2003. Of that total, over $52 million was directly tied to achieving earnings per share targets.

-Fannie Mae’s Board of Directors contributed to those problems by failing to be sufficiently informed and to act independently of its chairman, Franklin Raines, and other senior executives, failing to exercise the requisite oversight over the Enterprise’s operations, and failing to discover or ensure the correction of a wide variety of unsafe and unsound practices, even after the Freddie Mac problems became apparent.

-Senior management did not make investments in accounting systems, computer systems, other infrastructure, and staffing needed to support a sound internal control system, proper accounting, and GAAP-consistent financial reporting. Those failures came at a time when Fannie Mae faced many operational challenges related to its rapid growth and changing accounting and legal requirements.

-Fannie Mae senior management sought to interfere with OFHEO’s special examination by directing the Enterprise’s lobbyists to use their ties to Congressional staff to improperly generate a Congressional request for the Inspector General of the Department of Housing and Urban Development (HUD) to investigate OFHEO’s conduct of that examination and to insert into an appropriations bill language that would punish the agency by reducing its appropriations until the Director of OFHEO was replaced.


-Fannie Mae must meet all of its commitments for remediation and do so with an emphasis on implementation – with dates certain – of plans already presented to OFHEO.

-Fannie Mae must review OFHEO’s report to determine additional steps to take to improve its controls, accounting systems, risk management practices and systems, external relations program, data quality, and corporate culture. Emphasis must be placed on implementation of those plans.

-Fannie Mae must strengthen its Board of Directors procedures to enhance Board oversight of Fannie Mae’s management.

-Fannie Mae must undertake a review of individuals currently with the Enterprise that are mentioned in OFHEO’s report.

-Due to Fannie Mae’s current operational and internal control deficiencies and other risks, the Enterprise’s growth should be limited.

-OFHEO should continue to support legislation to provide the powers essential to meeting its mission of assuring safe and sound operations at the Enterprises.

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Fannie Mae: Case Study in Corporate Ethics

UPDATE - May 23, 2006 - Fannie Mae Agrees to Pay $400M Fine For Allegedly Manipulating Accounting Rules, Accepts Recommendations of OFHEO Report. See Above.

Implementing an effective ethics program in a company involves many components. Among other things, it requires promoting the development of a meaningful ethical culture and establishing a model “tone at the top” which influences all employees. It involves the pro-active encouragement across the enterprise of the corporate Code of Ethics and the visible application of the Code when difficult choices have to be made. It involves the senior staff directly responsible for corporate ethics and compliance exerting their influence not only on top management but also on those difficult, but crucial, corporate decisions which carry ethical dimensions.

The new report on Fannie Mae, consisting of more than 2,000 pages, provides detailed insights into each of these issues and thus constitutes a valuable case study. EthicsWorld has sought to summarize the findings from this perspective: 

A “Report to the Special Review Committee of the Board of Directors of
Fannie Mae”

by Warren Rudman, Robert Parker, Alex Young K.Oh, Daniel Kramer of Paul, Weiss, Rifkind, Wharton & Garrison LLP and by George Massaro and Jeffrey Ellis of Huron Consulting Group Inc. The report has become known as the “Rudman Report.
Published on February 23, 2006.

Corporate Culture: The Tone at the Top

The Report provides extensive detail suggesting that the senior management failed to communicate effectively with employees and that there was a widespread perception of a “culture of arrogance” coming from the leadership.  Little doubt is left that communication failures were part of a corporate culture that reduced the ability of top management to become aware of serious problems that were developing within the company. Thus, as the report notes, after the accounting scandal broke and the former chief executive officer resigned, new CEO and President Daniel H. Mudd resolved to change the corporate culture. He said in an interview with The Washington Post (June 3, 2005) that he aimed to establish “an attitude of service” towards the company’s investors and customers. In another interview with the same newspaper (November 16, 2005), Mr. Mudd said that the management’s approach to criticism used to be “shut the doors and huddle and navel gaze,” and the approach now is “open the doors and get out and ask people bluntly, right up front…What we have gotten wrong?”

The report notes that Mr. Mudd himself has said that earlier efforts at reforming corporate culture involved a tendency to “make a sport” of hiring consultants. These consultants, he stated, often make reform proposals that are then disregarded. The Rudman Report states that the comments it received from employees, directors and regulators suggest that Mr. Mudd’s reform efforts have led to widespread perceptions that the “tone at the top” has improved. It praises Mr. Mudd for seeking to improve internal and external communications, including a new willingness by the company to admit mistakes.

Applying the Code of Business Conduct


The Report highlights past approaches at Fannie Mae to promote good ethics. The professionals directly engaged in programs in this area are described as dedicated and well-meaning. But, it becomes evident from the Report that the overall corporate culture, as noted above, including the perceived arrogance of top management, severely undermined the success of distinct corporate ethics programs. Moreover, the report details several other significant weaknesses, which are unfortunately commonplace at many major corporations.

To understand the serious weaknesses in Fannie Mae’s approach to corporate ethics it is useful to first see what actions it had been taking. For more than a decade, the company highlighted its Code of Business Conduct to its employees and updated it from time to time in line with standard practice (partly reflecting, for example, the Sarbanes-Oxley Act and New York Stock Exchange requirements).  The core principles of the Code required employees to report any departure from or violation of the Code and prohibited retaliation against employees who made such reports.  The Code required employees to be open and trustworthy. The Code instructed employees to avoid conflicts of interest, and to abide by various laws and regulations that govern the company’s business transactions.

Fannie Mae provided employee Code-related training and it pursued investigations of Code violations and other corporate policies. It had a professional unit dedicated to handling employee complaints.  At the start of 2003 it enhanced the centralization and profile of its ethics and compliance program by:

  • pulling together ethics and compliance functions within the Legal Department;
  • creating the Office of Corporate Compliance (OCC) to provide central management of ethics and compliance matters;
  • appointing a Chief Compliance Officer to oversee the existing investigative unit (the Office of Corporate Justice (OCJ) and the new OCC; and,
  • replacing the old Business Conduct Committee (which had been chaired by the head of Human Resources) with a new management-level compliance committee chaired by the General Counsel.


The Rudman Report concluded that, despite the above approaches, the ethics and compliance program as of late 2004 suffered from numerous deficiencies. The Report noted that as of late 2004 the Fannie Mae ethics and compliance functions suffered from (direct quotes from the Report):

    • unstructured information flow to the Board;
    • inadequate commitment of resources;
    • inappropriate placement of ethics and compliance functions within the organizations;
    • inappropriate placement of the Chief Compliance Officer position; and,
    • insufficient cross-enterprise coordination.


Unstructured Information Flow to the Board

Detailed descriptions in the Rudman Report suggest that reporting ethics and compliance issues to the Board was an ad hoc matter and that there was no systematic written reporting from management to the Board on ethics and compliance issues.  While information was given to the Board from time to time, it does not appear that it was provided in ways that enabled the Board to assess the effectiveness of the company’s ethics and compliance programs. Organizational changes by management in this area were not presented to the Board for review.

Insufficient Resources

There was a constant shortage of resources to manage and develop the ethics and compliance programs at Fannie Mae. At times this resulted, for example, in drawing personnel away from training and guidance activities so that complaints could be better handled. There is an implication in the report that the programs in this area were just another set of tasks for the Legal Department and ones that neither required particular priority nor demanded requests to top management and the Board for enhanced resources.

Inappropriate Placement of Ethics and Compliance Functions.

The Report states bluntly that management’s decisions to place the ethics and compliance offices in a litigation section of the Legal department “was inappropriate in that it appeared to compromise the independence of the ethics and compliance program and limited its status and visibility within the organization.“

Employee confidence in the system was undermined by the possibility that the location of the ethics and compliance officers in the Legal department could be tainted by management’s litigation strategies. This potential conflict of interest was exacerbated, it states, by the fact that the Chief Compliance Officer was also the Deputy General Counsel in charge of the Legal department’s employment practice group, which was responsible for defending Fannie Mae’s interests against claims brought by company employees.

Weakness of the Chief Compliance Officer Position

The Report stresses that although it is not unusual for a company to have a chief compliance officer who is situated in the legal department, “it is both unusual and undesirable for a chief compliance officer not to report directly to the company’s board on compliance matters; and it is highly unusual for a chief compliance officer to have responsibility for supervising a company’s employment practice litigation.” 

Insufficient Cross-Enterprise Coordination

The Report noted that an annual ethics and compliance report was not provided to the Board of Directors in 2004 or 2005, that there were not systematic reports to the Board and that this omission, coupled with the low level of resources available for programs, prompts the conclusion that Fannie Mae “lacked an effective mechanism for coordinating compliance matters across the enterprise as of the second half of 2004.”


The Report notes a series of actions that have been taken in recent months at Fannie Mae to address the shortcomings noted above. Resources for the ethics and compliance programs have been sharply increased, a new Chief Compliance Officer has been appointed who reports directly to the CEO and to the Board’s new Compliance Committee. The position is at the Senior Vice President level and located outside of the Legal Department. Noting recent developments, the Rudman Report states that it sees progress now in enabling meaningful Board engagement on ethics and compliance matters. “Going forward, we think it is especially important for management reporting in these areas to provide meaningful risk assessments and discussion of perceived resource or other deficiencies.”

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Business Ethics: A Manual for Managing the Responsible Business Enterprise in Emerging Market Economies

Kenneth W. Johnson, director of the Ethics and Policy Integration Centre, is the principal author. Igor Y. Abramov, Senior Advisor, Market Access and Compliance, International Trade Administration, Department of Commerce, is coauthor. The Manual provides a comprehensive framework of concepts, relationships, and worksheets to help owners and managers of organizations of all sorts and sizes effectively, efficiently, and responsibly engage organizational stakeholders.

The Manual provides a comprehensive framework of concepts, relationships, and worksheets to help owners and managers of organizations of all sorts and sizes effectively, efficiently, and responsibly engage organizational stakeholders to:

  • Shape their vision for the organization;
  • Identify expected responsibility program outcomes;
  • Design and develop implementing strategies, structures, and systems; and
  • Align their communications, management practices, business conduct, and organizational learning toward that vision.

Designed as a training tool for enterprises operating in countries that have just recently transitioned to a market economy, Business Ethics will also be useful to decision-makers in any organization that is seeking to design and implement a business ethics program that conforms to global standards.

The 10 chapters of Business Ethics are organized into five sections that answer the questions:

  • What is a responsible business enterprise?
  • What is the relationship between law, ethics, and responsible business conduct?
  • What are the roles of corporate governance and social responsibility in business ethics?
  • What constitutes a business ethics program?
  • How is a business ethics program structured?
  • How is a business ethics program put into practice?
  • How can responsible business conduct be achieved?

Numerous practical examples drawn from successful European and American companies are located throughout the text. Worksheets and checklists in each chapter provide guided exercises for students, ensuring that the book is equally appropriate as part of a training program or for self-study.

Fully indexed, Business Ethics also contains an extensive bibliography, a glossary that explains the basic terminology of business ethics, and—in its nine appendices—numerous examples of business ethics policies adopted by various countries and organizations.

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Ethics at Work: Creating Virtue at an American Corporation
by Daniel Terris

In her July 4, 2005 review of the book reporter for Barron’s, Susan Witty, writes: “Daniel Terris, director of the International Center for Ethics, Justice and Public Life at Brandeis University in Massachusetts, has written a timely book. With the cooperation of Lockheed Martin, Terris spent two years examining its employee ethics program, a program Lockheed began developing in the late 1980s—before merging with Martin Marietta, and after being caught in overseas-bribery and government-overcharging scandals spanning several decades.”




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