Ethics & Employees
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The SHRM 2009 Global Diversity and Inclusion survey reveals that workforce diversity is a strategic initiative, with 60% of companies stating that the main advocates of workplace diversity and inclusion are the CEO and top management.
Human resource practitioners must manage global diversity strategically to transform it into an organizational asset, says SHRM. A new research article presents data that positions global diversity and inclusion as the next frontier for organizations’ competitive advantage.
The rise of globalization requires organizations to expand their vision of what ‘diversity’ means in the workplace and whom it targets. Workforce diversity is a complex term that evokes different perceptions in different organizations and cultures without any unitary meaning. Global diversity has been defined broadly as any characteristic used to differentiate one person from others or, more narrowly, in terms of demographic factors (e.g., national origin, age, gender, race and ethnicity). Broadening the concept of global diversity to increase its inclusiveness seems to be a trend in human resources. Many employers are using the term diversity of thought to value the unique perspectives individuals bring to organizations. Despite the broad strategic scope of diversity, a short-term focus can appear to be rather narrow. This focus is evidenced in the 2009 SHRM global research on diversity and inclusion, which found that women, according to 79% of executives, are the most important diversity group. By focusing first on women, global organizations target the largest underutilized group, representing a common diversity issue across geographies and business units.
The International Perspective
Diversity is a major HR topic in many countries. According to the Boston Consulting Group and the World Federation of Personal Management Associations (WFPMA) survey, managing diversity is perceived as more important in countries such as India (4th HR priority) and China (5th HR priority) than it is in the United States (where managing diversity is not in the top five HR priorities). India, for example, is unique in its magnitude of diversities, including more than 200 languages with 500 dialects spoken and 15 languages recognized by the Indian government. Virtually every major religion has a strong presence within India, and due to the diversity of religion and the importance of spiritualism, religious holidays and celebrations are observed all year.
To make global diversity the next competitive advantage, HR practitioners must develop the organization’s strategic diversity management plan. Key factors essential for a solid diversity plan include global mindsets (such as cultivated through formal education, including language skills), cross-border teams and projects, cultural learning programs, and international assignments. The key elements of a broad strategic global diversity management plan are:
Before evaluating or developing a strategic global diversity program, it is important that HR practitioners understand the current stage of globalization as well as the desired corporate diversity goals. HR should consider where the organization fits in terms of the continuum of globalization (that is, domestic, import/export, international/multinational and global) as well as its stages of diversity development (that is, compliance, acceptance, learning and empowering/leveraging). Figure 3 presents a global diversity assessment matrix with the most common diversity issues based on each stage of globalization. This diagnostic phase is a critical first step for HR practitioners to formulate an effective strategic diversity management plan. In sum, successful global diversity initiatives must start with diagnosis, must be continual rather than one-time efforts and must encompass a wide range of policies.
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The Fellows Program of the Ethics Resource Center has published a paper that presents the research and findings on the impact of ethics training on organizational and personal ethical outcomes. Specifically the research team explored which aspects of ethics training, particularly training methods, have the most impact on improved ethical outcomes such as increased reporting of misconduct and reduced pressure to violate organizational ethics standards.
The report contained a series of additional insights, including:
-- Interactive training methods that allow participants to approach ethical issues actively through case analysis or solving dilemmas produce the most positive perceptions and attitudes toward the organization.
Further, the report suggested that organizations should consider providing level-specific training in support of favorable ethics-related outcomes.
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The latest National Workplace Ethics Survey, released by The Ethics Resource Center (ERC), indicated just 20% of the American public had trust in the business community. However, in many ways companies are more involved in doing public good than ever before. The ERC, a U.S.-based research organization, and the U.S. Chamber of Commerce’s Business Civic Leadership Center jointly hosted a conference in Washington, DC to address the challenge of building public trust, both internally and externally with the community at large.
The passage of the Sarbanes-Oxley Act in the United States significantly changed corporate governance. Michael Oxley, former U.S. Congressman and co-architect of the legislation, explained the objectives behind the Act and how it has changed the corporate governance landscape. Although the Act has done much to make companies more accountable and transparent, most of the discussion revolved around what companies can do themselves to conduct business more ethically.
Pat Harned, President of the ERC, was interested in discussing what companies are doing well. Many CEOs are reluctant to talk about their companies’ ethics programs, Harned said, for fear of leaving themselves vulnerable to attack. However, those companies who are more outspoken are often viewed as the most ethical and most trustworthy.
A number of representatives of the business community offered their perspectives on how their own companies are confronting corporate governance and business ethics. A senior manager of Corporate Responsibility at Verizon Communications said his own company’s approach involved “engendering trust more organically.” In addition to evaluating company decisions against its own internal values, Verizon is also active in engaging the communities in which it works.
A common theme among the panel of experts was that the much-touted “tone at the top” really means nothing to an ethical corporate culture if it is not backed by actions. Strong corporate values must not only be firmly established among the top executives, but also must be filtered down within the operations of the business. If employee incentives are not aligned with the overall corporate values established at the top, there will be a breakdown in the system. Julia Sutherland, Managing Director at the corporate communications firm Public Strategies, said that if an employee is being told by his or her manager to meet certain goals, the directives coming from the corporate social responsibility (CSR) manager will mean nothing if they are not aligned with basic business operations. The worst thing a company can do, Sutherland said, is “walling off ethics and compliance,” or the CSR department. Company goals and values must be integrated.
Accountability to the company’s own employees is also key to establishing trust, said Michael Hershman, President of The Fairfax Group, LLC. Treating employees with dignity and respect is part of creating value for an important group of stakeholders. One piece of advice Hershman said he offered his own clients is that before making business decisions, executives should ask themselves whether they could explain that same decision to their families with a clear conscience. One of the problems Hershman described in a company’s structure is that employees are not the ones who judge a CEO’s performance. This is an explanation for why CEOs tend to consider opinions of the Board of Directors first. Additionally, few boards of directors factor in ethics and compliance issues when evaluating a CEO’s performance, so there is little incentive in this regard for a CEO to put a high value on ethical behavior. Despite these problems, if a company is serious about gaining public trust, considering all groups of stakeholders in strategic planning, outside of company shareholders, will be crucial.
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Fellows: Building a Unique Platform for Discussion Between Leading Ethics Practitioners that Promotes Research
The Ethics Resource Center in Washington DC announced that Jacqueline E. Brevard, Vice President and Chief Ethics and Compliance Officer of Merck & Co., Inc., has been selected as chair of the Ethics Resource Center's Fellows Program. Writing about the Fellows Program last year on its 10th anniversary, Ms. Brevard noted Merck, together with Guardsmark are the two founding Fellows of continuous standing. She noted, “Even at the 10th Anniversary mark, I continue to draw inspiration from the Fellows Program. Why? Because it affords me the unique opportunity to network with other ethics and compliance professionals who are equally passionate about safeguarding the reputation of our respective companies and passing it on to the next generation of employees.”
Jacqueline Brevard added, “This partnership also allows one to witness a remarkable richness of thought amongst ethics professionals in private industry, governmental agencies, as well as academia, as they examine and debate leading-edge ethics issues — an experience unparalleled in the ethics and compliance community.”
The critical outputs of the Fellows Program involve both the content of the informal discussions in seminar-style among the Fellows twice each year, and specific research reports developed by leading academics with guidance from members of the Fellows Program. Fellows working groups develop whitepapers, toolkits and journal articles for everyday use.
Examples of practical tools resulting from ERC Fellows Working Groups:
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Parts of this article were reprinted with the permission of the Society for Human Resource Management
The Society for Human Resource Management (SHRM) offers an important perspective on how human resource managers are integral to creating an ethical culture. A recent article from the U.S.-based association highlights the connection between employee trust in management and business success. One academic report cited in the article discusses trust as it pertains to the American employee, while another study is cited for exploring the same issue in Chinese companies.
According to SHRM, “The researchers attribute increased performance to the decrease of distractions associated with trusting one’s supervisor and the resulting increase in focus on the job.” In this context, trust was defined as a perception of ability, benevolence and integrity in office management. A study that was done at an American nonunion manufacturing firm showed that employees that had trust in “multiple levels of management” had a higher employee performance rate and overall better organizational citizenship behavior (OCB), both of which contribute to a company’s bottom line. If employees see their supervisor, director or CEO as someone who acts in accordance with their own values, is competent and treats them fairly, there will be less cause for distraction at work or unethical behavior.
SHRM cites a different study that observed Chinese workers in both joint-venture firms and state-owned enterprises, the two most common types of companies in China. The article states “Trust in organization was positively related to OCB in both joint ventures and state-owned enterprises.” The difference, according to the study, is that joint venture firms tend to be more future-oriented and greater focus is placed on the relationships between superiors and subordinates. A greater perception of trust within these relationships contributes, at least in part, to these firms’ higher rates of success, according to the study. Therefore, it is seen across the globe that strong relationships between management and employees is positively correlated to higher employee performance.
Based on these findings, SHRM’s position is that human resource managers, whether in American or foreign companies, should take time to cultivate a relationship with their employees to foster a more open and trusting environment. This could include better communication and ensuring employees are properly trained for the tasks they are asked to do.
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Amnesty International - Netherlands Navigates Challenges Companies Face in Creating Non-Discrimination Policies
A report, released by the Dutch section of Amnesty International as part of its Human Rights and Business Pages series, explains the importance of implementing solid non-discrimination policies in the workplace and how to confront the challenges that many companies face in doing so. More and more companies are trying to refine their policies to meet the rising challenges that come with working internationally. National laws in many countries allow prosecution of companies for human rights abuses in business practices abroad. Companies must be much more knowledgeable about the conditions under which they are working in order to comply with proper national, regional, and international laws, the report says.
Amnesty International argues protecting freedom from discrimination in the workplace is part of a country’s duty to uphold human rights. Therefore, states have a role to play in regulating and monitoring companies. International law provides for the right to freedom of discrimination in the workplace, United Nations conventions exist to help states better monitor the actions of non-state actors, many regional conventions also exist for the same purpose, and those countries that ratify these conventions are expected to integrate them into their national laws. This complex network of regulations and legislation which the report outlines provides more challenges for companies to ensure compliance.
The report lists some of the most common challenges companies face, most arising from working internationally, and gives suggestions for best practices.
Filing a complaint – Companies are often caught between recognizing the need for anonymity and having the ability to prosecute the offender if necessary. Amnesty International emphasizes that an employee who files a complaint must be able to do so without fear of reprisals in the future. This should be done anonymously if possible, but more importantly, there should be trust that the management will investigate the report and take the matter seriously. The report cites that most companies do not keep a central record of complaints that were filed. This action could be helpful if the record is reviewed by senior management in order to evaluate the effectiveness of the company’s non-discrimination policies.
Who defines “merit”? – Sometimes selection between candidates for positions indirectly excludes certain people. Amnesty International believes it is important to define the criteria in relation to the skills required for the specific job so that the process is clear and transparent.
Cultural differences – Especially for companies working internationally, sometimes there is internal opposition to non-discrimination policies due to social norms within certain communities. Amnesty International emphasizes that policies should remain objective, consistent, and transparent throughout the company. Other ways of overcoming cultural opposition are raising awareness within the company of non-discrimination practices and employee training. Finally, internal complain mechanisms should also be strong to combat instances of discrimination when they occur, the report says.
Conflicting national laws – When national laws conflict with company policies, companies should seriously consider suspending their practices in the area.
Gender – Gender equality is not treated the same in every country. Managers should have in-depth knowledge of national laws and the human rights situation on the ground before deciding to operate in the country, Amnesty International believes.
Ethnic tension – The community “culture” should seriously be considered before agreeing to operate in particular countries because companies could negatively contribute to prejudices that already exist. The report also points out that depending on the situation and with the right strategies, companies could change negative attitudes in a positive way.
Migrant workers – Amnesty International believes workers performing the same job must be treated equally and paid equally.
Sexual harassment – It is often difficult to tell the difference between what is perceived as sexual harassment and what can be substantiated as sexual harassment, the report explains. Companies must have a clear policy and anti-harassment training for its employees as part of an effort to create an ethical workplace culture.
In another section of the report, case studies are provided where companies have acted as “forces for good” in otherwise difficult communities. Cases include migrant workers in China; ethnic discrimination in Bosnia, Herzegovina, and Rwanda; caste discrimination in India; gender discrimination in India; and harassment in Latin America.
Read the full report.
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In a new white paper, The Enemy Within: Corporate Fraud and the Employee - A Roadmap, UK law firm Glovers Solicitors and Privy Council Agents states that over £40 million is lost every day to fraud in the UK, that 80% of that fraud involves an employee, and that 90% of fraudulent employees have been with their employer for more than a year – 20% for more than a decade. Arguing that these statistics represent a huge risk to corporations, the guide offers companies directions for three main elements of dealing with insider fraud - deterrence, punishment and protection (Note: While the guide refers to some laws specific to the UK, its suggestions can be useful for all companies).
The paper makes several suggestions for deterring corporate fraud -
Use the employment contract as a deterrent against fraud by including a “fraud buster” clause that mandates fraud awareness training and includes:
The Disciplinary Process - Investigating Fraud
The paper argues that the best approach to investigating employee fraud is to report the activity to the police, taking legal action to preserve evidence and freeze assets before informing employees of the investigation; make IT-based evidence clear and understandable; get statements from potential witnesses early in the process; and make decisions of guilt based on a balance of probabilities.
The Disciplinary Process - The Letter
The letter should:
For the full paper visit Glover Solicitors' website.
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Excerpts from the BP Safety Report
Few issues are as important in the realm of workplace ethics as the approach of corporate leadership to the safety of employees. The BP tragedy in Texas and the independent report on it provides a vital set of insights that are applicable not only to BP, but to many other companies as well.
The Panel's Statement
Process safety accidents can be prevented.
On March 23, 2005, the BP Texas City refinery experienced a catastrophic process accident. It was one of the most serious U.S. workplace disasters of the past two decades, resulting in 15 deaths and more than 170 injuries.
In the aftermath of the accident, BP followed the recommendation of the U. S. Chemical Safety and Hazard Investigation Board and formed this independent panel to conduct a thorough review of the company’s corporate safety culture, safety management systems, and corporate safety oversight at its U.S. refineries. We issue our findings and make specific and extensive recommendations. If implemented and sustained, these recommendations can significantly improve BP’s process safety performance.
Although we necessarily direct our report to BP, we intend it for a broader audience. We are under no illusion that deficiencies in process safety culture, management, or corporate oversight are limited to BP. Other companies and their stakeholders can benefit from our work. We urge these companies to regularly and thoroughly evaluate their safety culture, the performance of their process safety management systems, and their corporate safety oversight for possible improvements. We also urge the same companies to review carefully our findings and recommendations for application to their situations.
Preventing process accidents requires vigilance. The passing of time without a process accident is not necessarily an indication that all is well and may contribute to a dangerous and growing sense of complacency. When people lose an appreciation of how their safety systems were intended to work, safety systems and controls can deteriorate, lessons can be forgotten, and hazards and deviations from safe operating procedures can be accepted. Workers and supervisors can increasingly rely on how things were done before, rather than rely on sound engineering principles and other controls. People can forget to be afraid. When systems and controls deteriorate, everything can come together in the worst possible way. Equipment malfunctions and controls fail. An explosion and fire occur. People lose their lives or suffer horrible injuries. Families and communities are devastated.
The Panel focused on deficiencies relating to corporate safety culture, process safety management systems, and performance evaluation, corrective action, and corporate oversight.
The Panel's Findings
Process safety leadership. The Panel believes that leadership from the top of the company, starting with the Board and going down, is essential. In the Panel’s opinion, it is imperative that BP’s leadership set the process safety “tone at the top” of the organization and establish appropriate expectations regarding process safety performance. Based on its review, the Panel believes that BP has not provided effective process safety leadership and has not adequately established process safety as a core value across all its five U.S. refineries. While BP has an aspirational goal of “no accidents, no harm to people,” BP has not provided effective leadership in making certain its management and U.S. refining workforce understand what is expected of them regarding process safety performance.
BP has emphasized personal safety in recent years and has achieved significant improvement in personal safety performance, but BP did not emphasize process safety. BP mistakenly interpreted improving personal injury rates as an indication of acceptable process safety performance at its U.S. refineries. BP’s reliance on this data, combined with an inadequate process safety understanding, created a false sense of confidence that BP was properly addressing process safety risks. The Panel further found that process safety leadership appeared to have suffered as a result of high turnover of refinery plant managers.
Employee empowerment. A good process safety culture requires a positive, trusting, and open environment with effective lines of communication between management and the workforce, including employee representatives. Cherry Point has a very positive, open, and trusting environment. Carson appears to have a generally positive, trusting, and open environment with effective lines of communication between management and the workforce, including employee representatives. At Texas City, Toledo, and Whiting, BP has not established a positive, trusting, and open environment with effective lines of communication between management and the workforce, although the safety culture appears to be improving at Texas City and Whiting.
Incorporation of process safety into management decision-making. The Panel also found that BP did not effectively incorporate process safety into management decision-making. BP tended to have a short-term focus, and its decentralized management system and entrepreneurial culture have delegated substantial discretion to U.S. refinery plant managers without clearly defining process safety expectations, responsibilities, or accountabilities. In addition, while accountability is a core concept in BP’s Management Framework for driving desired conduct, BP has not demonstrated that it has effectively held executive management and refining line managers and supervisors, both at the corporate level and at the refinery level, accountable for process safety performance at its five U.S. refineries. It appears to the Panel that BP now recognizes the need to provide clearer process safety expectations.
Performance Evaluation, Corrective Action, and Corporate Oversight
Maintaining and improving a process safety management system requires the periodic evaluation of performance and the correction of identified deficiencies. As discussed more fully in Section VI.C, significant deficiencies existed in BP’s site and corporate systems for measuring process safety performance, investigating incidents and near misses, auditing system performance, addressing previously identified process safety-related action items, and ensuring sufficient management and board oversight.
BP’s Board of Directors has been monitoring process safety performance of BP’s operations based on information that BP’s corporate management presented to it. A substantial gulf appears to have existed, however, between the actual performance of BP’s process safety management systems and the company’s perception of that performance. Although BP’s executive and refining line management was responsible for ensuring the implementation of an integrated, comprehensive, and effective process safety management system, BP’s Board has not ensured, as a best practice, that management did so. In reviewing the conduct of the Board, the Panel is guided by its chartered purpose to examine and recommend any needed improvements. In the Panel’s judgment, this purpose does not call for an examination of legal compliance, but calls for excellence. It is in this context and in the context of best practices that the Panel believes that BP’s Board can and should do more to improve its oversight of process safety at BP’s five U.S. refineries.
The Panel's Recommendations
RECOMMENDATION # 1 – PROCESS SAFETY LEADERSHIP
RECOMMENDATION #2 – INTEGRATED AND COMPREHENSIVE PROCESS SAFETY MANAGEMENT SYSTEM
RECOMMENDATION #3 – PROCESS SAFETY KNOWLEDGE AND EXPERTISE
RECOMMENDATION #4 – PROCESS SAFETY CULTURE
RECOMMENDATION #5 – CLEARLY DEFINED EXPECTATIONS AND ACCOUNTABILITY FOR PROCESS SAFETY
RECOMMENDATION #6 – SUPPORT FOR LINE MANAGEMENT
RECOMMENDATION #7 – LEADING AND LAGGING PERFORMANCE INDICATORS FOR PROCESS SAFETY
RECOMMENDATION #8 – PROCESS SAFETY AUDITING
RECOMMENDATION #9 – BOARD MONITORING
RECOMMENDATION #10 – INDUSTRY LEADER
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New Research Identifies Three Workplace Actions That Contribute Most to Employees' Ethical Behavior and Compliance
from the Ethics Resource Center
A new research report, by the US-based Ethics Resource Center (ERC) and Working Values, Ltd., "Critical Elements of an Organizational Ethical Culture," builds on the ERC's 2005 National Business Ethics Survey® (NBES). This measured ethical culture by asking employees if management and coworkers demonstrated various "ethics-related actions" (ERAs) in the workplace.
The new analysis also finds that ethics training is more useful in helping junior employees feel prepared to handle misconduct than it is for senior employees, indicating that training needs to be tailored to different employee levels. Upper management may need advice about how to demonstrate its commitment through action, while junior employees need instruction about how to handle specific ethics challenges.
Working Values® Ltd., a SmartPros (AMEX: PED) company, is an industry leading developer of integrated values-based corporate responsibility and ethics awareness and compliance learning programs. Since 1993, Working Values has helped organizations such as America Online, JP Morgan Chase, Coors Brewing Company, Schering Plough and Raytheon align workplace behavior with standards, values and ethical principles.
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By Dr. Oladele Akin-Ogundeji
The following is from a detailed set of perspectives from a paper entitled: 'Taming Corporate Frauds from the Root.' The white paper addressed more than twenty behavioral approaches to understanding and managing corporate frauds, including psychometric testing of employees, optimizing rewards systems within organizations, and organizational cultural reorientation. The author cites several key factors which contribute to corporate fraud, including:
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How Companies Can Determine the Benefits Employee Volunteer Programs Generate for Their Bottom Line
Many companies – even those with the most advanced employee volunteer programs – fail to make a strong case for employee volunteer programs because they don't link the benefits of volunteering to business functions.
This can be a serious mistake that can mean the difference between increased funding and elimination of the program.
Five Critical Success Factors
Five success factors are critical when creating and implementing an employee volunteer program measurement process:
Take a strategic approach. Start by clearly identifying the key goals you are trying to deliver. If employee morale and retention are key goals, specify these goals up front, before designing the program. Setting goals and planning to measure them will drive how the program is designed.
Build a conceptual framework for your program. Design a measure that specifically addresses the desired outcome.
Take an inventory of existing metrics. When possible, take advantage of existing measures used inside the company.
Find the metric gaps and modify as necessary. Identify a measurement process for each goal.
Engage key stakeholders. Overcome skepticism by making the process participatory. Engaging key stakeholders in the measurement process, from the identification of data points to data collection methods, will foster buy-in and increase the relevance of the program for the company as a whole.
Building, Testing, and Implementing the Framework
Step 1: Identify the relationship between the volunteer program company goals, stakeholder needs, and potential outcomes of the program.
Step 2: Define measurement questions and criteria.
Step 3: Implement the measurement process to test the conceptual framework, which helps assess whether current programs support goals.
Research for "Measuring Employee Volunteer Programs: The Human Resources Model" included interviews with the human resource and volunteer program administrators from a cross-section of companies with volunteer programs of varying levels of sophistication. The publication also includes insights and examples from such companies as IBM, Deloitte & Touche, and Safeco Insurance. To download the complete publication, click here.
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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.
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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.”
-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.
-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 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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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
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.”
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:
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
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.”
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:
The 10 chapters of Business Ethics are organized into five sections that answer the questions:
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
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