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Ethics and Compliance Due Diligence and Integration Processes for New Acquisitions

A Paper Developed and Published by the ERC Fellows Program

The Ethics Resource Center established a Fellows Program 10 years ago to bring together chief corporate ethics officers and ethics scholars to exchange views and develop research. ERC studies have revealed that building an ethical culture is especially difficult after the amalgamation of two companies. Discussions among the Fellows have involved observations that many corporate mergers fail because of inadequate early attention to divergent corporate cultures and insufficient attention to the challenges involved in establishing a common ethics approach in the new combined entity. These discussions led to a project with the Fellows Program that has yielded the following guidance template for corporations.

The Fellows recommend that the ethics and compliance officer have a seat at the table during the due diligence process and offer the following template to assist with the discussions. The questions in this template are meant to serve as a guide. Adapting this guide will require additional questions specific to the industry and the circumstances under consideration. The information gathered during the due diligence process should drive action during the integration phase of the acquisition, unless there is data found during due diligence which suggests that the acquisition should not go forward.

The Fellows also recognized that there could be circumstances when the ethics and compliance officer may not have a seat at the table during due diligence or when the due diligence phase precludes such a review. In these situations, the Ethics and Compliance Officer should clearly have a seat at the table during the Integration phase and should proceed with all haste to do this review and to proceed with appropriate actions.

Purpose & Objectives

Review “target company’s” ethics and compliance related policies and practices to determine compatibility with acquiring company’s policies and practices and the acquiring company’s Code of Conduct.

Objectives:

• Identify areas of risk of non-compliance and incompatibility.

• Make recommendations to management concerning changes, adaptations, exceptions, warranties, and representations that would be required by the target company in order to successfully integrate/merge with acquiring company. Such recommendations shall include an assessment of the impact on the business of any changes/adaptations that would need to be made in order to meet acquiring company’s standards and requirements. Such recommendations should also consider if the target company has any practices that should be adopted by the acquiring company.

• Acquaint target company management during the pre-acquisition stage with standards and requirements and Code of Conduct.

Procedure

The review shall consist of face-to-face key management interviews of the target-operating unit. The people to be interviewed and the actual schedule shall be determined in consultation with an official representative of the target company. The scope of the review shall include all activities that have occurred within the last five years. The interviews shall be conducted using the attached questionnaire as a guideline. The interview shall be conducted by an acquiring company operating unit person who is familiar with the acquiring company’s standards, requirements and Code of Conduct. Copies of relevant target company policies, procedures, publications and documents shall be discussed and collected in connection with the review. Subsequent to the on-site review, a report with recommendations shall be provided to appropriate acquiring company management for inclusion in the acquisition evaluation process. The report shall include an assessment of the impact to the business that would likely result from the need to correct any questionable or improper business practices that were identified in the course of the review. This assessment is to be done in consultation with acquiring company’s finance and legal departments.

Assessments Should Be Made Of:

• Reputation of target company in the community;

• Reputation relative to competitors;

• Support for third party codes, OECD Guidelines for Multinational Enterprises, ILO Declaration of the Fundamental Principles and Rights at work, International Model Principles; and

• Support for a values based program versus a rules only based program.

The acquisition agreement is to include representations, warranties and indemnities based on the findings in the ethics and compliance due diligence.

For the detailed “Ethics and Compliance Due Diligence and Integration Questionnaire” please visit the website of the Ethics Resource Center.

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Defining the Corporate Ethics Brand

By Ronald E. Berenbeim
Principal Researcher and Director of
The Conference Board’s Working Group onGlobal Business Ethics Principles
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This essay title provides an insight to readers of EthicsWorld of the complex overlaps between the diverse aspects of business ethics. Our pages at EthicsWorld relate to ethics and employees in corporations, to corporate governance from the boardroom and senior management to shareholders, to corporate social responsibility and to the business engagements in the world of public sector governance.

The essay begins by noting: “Most of the world does not distinguish between Corporate Ethics and Corporate Social Responsibility when it comes to determining what it means for a company to be ethical. Yet within companies, these two approaches tend to be located in separate departments, have different lines of authority, and different sources of institutional support. Is there a way to integrate them and mold a coherent Corporate Ethics Brand?”

Excerpts:

The November 1, 2004 promulgation of the (U.S.) Revised Sentencing Guidelines advising companies that ethics and compliance programs should “promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law”, and the proliferation of Socially Responsible Investment Funds that screen corporate ethics performance in a broad range of categories—to cite just two prominent examples— raise the question of how an organization’s core ethical competency ought to be defined. Operationally, a company’s ethics profile is the outcome of two historical developments.

Internally, organizations established compliance programs in the wake of defense procurement and bribery scandals to which the Defense Industry Initiative and the 1991 Organizational Sentencing Guidelines were a response. These initiatives set business conduct standards for employees and (increasingly agents) of the company. Program effectiveness is reinforced with ethics training and hotlines for reporting improper conduct with the system being monitored for effectiveness. During the same period, Corporate Social Responsibility (CSR) advocates promoted standards of ethical performance in the company’s relationships with the global community. This development was also a response to pressures resulting from incidents that raised questions about corporate conduct—in this case events such as the Bhopal disaster in India and the more recent Nike product sourcing controversies.

In spite of this organizational separation, for a company’s stakeholders—its shareholders, employees, suppliers, customers, and citizens of the communities in which it operates— its ethical reputation depends on the implementation of both approaches. The company must have safeguards that minimize the occurrence of ethics lapses such as conflicts of interest, insider trading, and bribery of public officials; and at the same time it requires policies for socially responsible sourcing, packaging, and energy use practices. In the public view, both kinds of conduct are part of the company’s ethics brand. This identity is indivisible. It is not a defense to a massaged earnings statement that the company is an industry leader in enlightened energy
consumption.

Making the Business Case 

Ethics programs are an exercize in minimizing the risk of potentially harmful employee conduct. Properly designed, implemented, and monitored for effectiveness, ethics programs can do more than that. There is a growing recognition that business practitioners need to be held to high standards of performance with respect to conduct as well as financial results. Adherence to ethics standards is the hallmark of a profession, and business schools are beginning to acknowledge as much with the inclusion of business ethics in the curriculum. Indeed, it is possible that a new generation of practitioners whose formal degree requirements includes business ethics discussion will have some impact on the programs that companies will institute in response to the 2004 Revised Sentencing Guidelines. In this regard, the most important of the changes mandated by the new Guidelines is to instill an ethical culture within the company. More informed discussion of ethics issues is an important means for advancing this goal. Optimally, an environment in which decision-makers are comfortable with the ethics discussions that the new Guidelines encourage will avoid the problem of an “ethical division of labor” that defines the company’s ethical obligations as the minimal legal requirements that the company’s lawyers are willing to tolerate.

Corporate Social Responsibility

Unlike ethics programs, CSR justification is not rooted in the need for normative requirements to support professional standards but in the distinction between profits and value and the potential of CSR programs to enhance the latter. This distinction rests on the notion that companies need both “private” and “public” capital. Private capital consists of the profits and economic resources invested in the company by its managers. Public or social capital is the goodwill that the enterprise receives from its fellow citizens—sometimes called stakeholders (e.g., employees, local communities, and customers).

In working to achieve some degree of integration between their ethics and CSR programs company leaders will gain a better understanding of the circumstances under which there are constraints on their own actions dictated not by law or custom but by the ethos of the company whose agents they are. And the implementation of CSR programs that are consistent with the principles for which the company stands will generate real reserves of social capital.

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Nowhere to Hide - The Challenge of Managing Corporate Ethics: Speech by Frank Vogl

Address to Valmont Industries Accounting & Finance Seminar, Omaha, Nebraska, May 15, 2005.

Corporate scandals have diminished public confidence in the leadership of American business. More investigations and scandals are probable and they may lead to still more public anger and more pressure on politicians and regulators to respond. The first round of scandals saw Congress pass the Sarbanes-Oxley Act. Since then we have learned about fraud and malfeasance in the mutual fund and insurance sectors and in a host of major corporations.

There is a grave danger that the politicians will continue to believe that they can legislate ethics. The danger is to our economic system. More official regulation will threaten the vibrancy of enterprise, undermine our free market’s creativity and flexibility and damage our economic prospects. It is urgent that business demonstrates that it recognizes these dangers, that it understands the need to restore public trust through its own voluntary actions.

Why has this crisis been so large and embraced so many corporations? There are many explanations, but an important one relates to technology. Embarrassing e-mails at Boeing, Enron, Merrill Lynch, Credit Swiss, Morgan Stanley and scores of other enterprises have shown how greed triumphed over sound ethics. The hard-drives of corporate computers are revealing secrets that are exposing myriad unethical practices. In this era of an aggressive Securities and Exchange Commission, Elliot Spitzer, the Internet and a media fascinated by business scandals, the corporations of America have nowhere to hide.

Thanks to the Internet the ability of corporations to keep information confidential is declining fast. Meanwhile, the scale of false information about corporations that appears on the web is multiplying. As we look ahead we must come to terms with four considerations:

  • The amount of information available in the public domain about every aspect of a publicly quoted corporation’s business will rise.
  • The number of investigations into corporate wrong-doing will increase.
  • The sophistication of pressure groups seeking to force corporations to reform will grow.
  • And, these forces will compel business to recognize that when there is nowhere to hide, then there is no choice other than to confront the wrongdoing in its midst and institute reforms consistent with this age of transparency.

Please follow this link to read the full speech...

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