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• Two Speakers Give Students Their Insight on What Drives Unethical Corporate Behavior
• Improving Labor Standards - The Importance of A Long-Term Relationship
• Convergence - Principles and Rules-Based Ethics
• Human Rights Watch Reports on Wal-Mart
• Ethics and Mergers and Acquistions - Recommendations for Success
• Ronald Berenbeim on "Defining the Corporate Ethics Brand"
• Frank Vogl Speech on Managing Corporate Ethics
  
  
  
  

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Two Speakers Give Students Their Insight on What Drives Unethical Corporate Behavior

Reprinted with permission from Knowledge@Wharton – the online research and business analysis journal of the Wharton School of the University of Pennsylvania. Knowledge@W.P. Carey, associated with the W.P. Carey School of Business at Arizona State University, is a member of the Knowledge@Wharton Network.

The following are excerpts from the Knowledge@W.P. Carey article, "Bradley Preber: Aligning Form and Substance to Create an Ethical Business Culture":

Bradley Preber, partner-in-charge of Grant Thornton's Forensic Accounting and Investigative Services practice, spoke before a group of W. P. Carey MBA Executive students the same day that an independent report commissioned by the U.S. Department of Justice found that the auditing firm KPMG is allegedly linked to fraud at New Century Financial Corp, a subprime mortgage lender. KPMG denies any wrongdoing, but the incident raised some interesting ethical questions during the discussion, part of the school’s Thought Leadership Series.

When students raised the subject of alleged fraud at New Century, Preber noted the importance of corporate culture as a driver of ethical behavior. 

Preber added that culture is a factor that can be used to predict fraud and evaluate a company's ethics. He asked his audience to consider some companies that have been in the news for ethical situations and to free associate. Prompted with Enron they offered ‘greed,’ ‘putting profits before people,’ ‘arrogance.’  When asked about Microsoft, they said ‘competence,’ ‘market dominance,’ even ‘innovation.’

Form of culture and substance of culture must align

Preber argued that the form of a company's culture must align with the substance of the culture. Form, Preber said, includes standards and values that can be verbalized or written down. He stated examples such as policies and procedures, compliance officers, industry norms and laws and regulations. Substance, however, is the action that grows out of acceptance of the form, by the company, its managers and its employees. Actions could include the way employees talk about their bosses, establishment of an anonymous complaint line for employees and rewards for good behavior.

If substance and form align, Preber explained, then desirable and acceptable workplace behaviors are more probable. When unethical behavior surfaces and is tolerated, it is because form and substance of culture are unaligned.

"This is when attitudes deteriorate and the incentives for unethical behavior rise," Preber said.

Avoiding the gray area

Marianne Jennings, a professor of legal and ethical studies in business at W. P. Carey School of Business, frets about stories like KPMG. Author of "The Seven Signs of Ethical Collapse: How to Spot Moral Meltdowns in Companies … Before It's Too Late," Jennings noted that previously, scandals only surfaced every decade.

In her book, Jennings writes that "all unethical organizations are alike; their cultures are identical and their collapses become predictable." She identifies seven warning signs that a company culture is unethical: pressure to maintain numbers; fear and silence in the ranks and leadership; young and inexperienced executives and a bigger-than-life CEO; a weak board; conflict; pressure to produce constant innovation; and a penchant for philanthropy that assuages guilt for questionable decisions.

When a sufficient number of the seven signs have infected the culture, Jennings writes, intelligent and otherwise upstanding people may do things that are at least unethical, and often illegal.

Things start to become slippery, Jennings said, because that gray area can include unethical actions that are not technically illegal. "If we want change, then it is the ethics within this gray area that must be studied more."

Bottom Line

Brad Preber, an accountant dealing with fraud and litigation cases, says that we can learn a great deal about a company's ethics through its culture.

He also thinks that when the form and substance of a company are out of whack, attitudes deteriorate and incentives for ethical behavior wane.

Jennings' seven warning signs that a company culture is unethical: pressure to maintain numbers; fear and silence in the ranks and leadership; young and inexperienced executives and a bigger-than-life CEO; a weak board; conflict; pressure to produce constant innovation; and a penchant for philanthropy that assuages guilt for questionable decisions.

If you find yourself in a gray area, you are probably already in trouble, Jennings says.

Posted 4/21/08

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Improving Labor Standards - The Importance of A Long-Term Relationship

An article by Rachelle Jackson in Ethical Corporation Magazine

In the monthly magazine, Ethical Corporation, Rachelle Jackson, director of research and development at Cal Safety Compliance Corporation, discusses the gap that exists between companies’ reports on labor standards and their actual success in granting fair wages and working hours. According to the article, “Labor Standards – More News Is Not Always Good News,” Gap, Inc. reported improvements in their sourcing efforts, while Wal-Mart and Ikea reported an increase in violations of labor standards. For all companies, wages and working hours remained stable.  Jackson addresses data limitations in reporting and emphasizes the long-term relationship between companies and their suppliers as a key component to successful sourcing strategies.

The following are excerpts from the article, reproduced with permission from the October edition of the London-based global business magazine Ethical Corporation. 

More multinational companies are reporting on the progress of their responsible sourcing programs. A look at their data over a few years reveals mixed results.

Since 2004, Gap has been reporting on its responsible sourcing efforts, including specific data on factory monitoring. Following Gap’s lead, Wal-Mart, Ikea, Reebok, Nike and others have begun to disclose monitoring statistics as well. These numbers typically indicate the percentage of suppliers by region that are compliant, with anywhere from ten to 100 compliance indicators.

To get a quick idea of what the abundant data shows, we can look at a few key indicators related to child labour, wages, work hours and worker treatment from suppliers based in Asia.

The Gap reports indicate that there were improvements in supplier compliance related to age documentation, voluntary overtime and worker treatment, over a three-year period from 2003 to 2005. For Wal-Mart, the findings in these areas were nearly the opposite. Wal-Mart saw an increase in violations over 2004-05.  For both Gap and Wal-Mart, the data showed no visible changes in wages and work hours indicators over the multi-year period. Ikea, which classifies its findings by much broader categories, saw no change in the area of wages and hours and an increase in the violations related to worker treatment in Asia from 2004 to 2006.

Important to understanding this apparent conundrum, Gap provides an excellent discussion of the limitations of monitoring data in its 2004 report. For example, Gap discusses how training monitors and improving detection skills may result in a related spike in findings in the subsequent year. In evaluating overall supply chain performance, it is important to consider these types of contributing factors that may skew data.

Even more important to understanding the data, consider that sourcing locations are constantly changing, for some product types more than others. Therefore, the variation in findings from year to year normally will not represent the same pool of suppliers, but rather the current suppliers for that year. Newer suppliers may have less experience with compliance and therefore demonstrate worse performance.

The data underscores the importance of a long-term relationship with the supplier when seeking sustained improvements in labor rights. For some product lines, this is much easier said than done.

Nike shows one way forward in its latest report, where different goals are set for the 20% of its supply base that is long term, representing 80% of Nike’s products. Nike is focusing on improving conditions with long-term partners, capitalizing on increased influence and opportunity for improvement over time.

Hopefully its future monitoring data will also set new standards. While the reporting of monitoring data has come a long way in a few short years, it still has a long way to go.

Posted 10/11/07

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The Convergence of Principle- and Rule-Based Ethics Programs: An Emerging Global Trend?

Authors: Ronald E. Berenbeim and Jeffrey M. Kaplan

Published in March 2007 by The Conference Board (Report Number:  A-0231-07-EA)

Ronald E. Berenbeim writes: - There is a growing recognition that ethics and compliance are both essential elements in an effective system. And there are some preliminary signs that legal imperatives in various countries will push companies toward a middle way that embraces aspects of both approaches.

This debate may be working to the advantage of all participants. A review of aspects of current practice in the United States, Australia, Italy, the United Kingdom, Norway, Switzerland, South Korea, and Canada suggests initial signs of a growing convergence in approach between recent U.S. governmental and company efforts to take a more principle-based approach through instilling an ethical culture and evolving non-U.S. standards that recognizes the importance of key compliance program structural elements such as codes, training, and hotlines.

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Human Rights Watch Alleges that Wal-Mart Denies Workers Basic Rights in United States

In a 210 page report Human Rights Watch Argues that Weak Labor Laws Perpetuate Abuses

Wal-Mart workers have virtually no chance to organize because they’re up against unfair US labor laws and a giant company that will do just about anything to keep unions out. That one-two punch devastates workers’ right to form and join unions.
Carol Pier, senior researcher on labor rights and trade at Human Rights Watch

Excerpts from the Human Rights Watch statement (see the full report - Discounting Rights: Wal-Mart's Violation of US Workers' Rights to Freedom of Association)

Human Rights Watch stated that in researching its report it found that while many American companies use weak US laws to stop workers from organizing, the retail giant stands out for the sheer magnitude and aggressiveness of its anti-union apparatus. Many of its anti-union tactics are lawful in the United States, though they combine to undermine workers’ rights. Others run afoul of soft US laws.  
 
“Wal-Mart workers have virtually no chance to organize because they’re up against unfair US labor laws and a giant company that will do just about anything to keep unions out,” said Carol Pier, senior researcher on labor rights and trade for Human Rights Watch. “That one-two punch devastates workers’ right to form and join unions.”  
 
As the world’s largest company, Wal-Mart’s conduct is especially troubling. Wal-Mart had $351.14 billion in revenue and $11.3 billion in profits in the fiscal year ending January 2007. It is the largest private US employer, with more than 1.3 million US workers and close to 4,000 stores nationwide. None of those workers is represented by a union. Human Rights Watch found that this is no accident.  
 
Human Rights Watch’s investigation revealed that, in most cases, Wal-Mart begins to indoctrinate workers and managers to oppose unions from the moment they are hired. Managers receive explicit instructions on keeping out unions, many of which are found in the company’s “Manager’s Toolbox,” a self-described guide to managers on “how to remain union free in the event union organizers choose your facility as their next target.”  
 
If workers try to organize, store managers must report it to Wal-Mart’s Union Hotline at headquarters. The company responds by sending out its Labor Relations Team almost immediately to squash the organizing effort.  
 
Most of the Labor Relations Team’s tactics comport with weak US law. Team members hold small- and large-group “captive audience” meetings, which workers are strongly urged to attend. Workers hear of the terrible consequences of union formation and see videos dramatizing the message. Wal-Mart envelops workers with its anti-union mantra and allows little space for union supporters and organizers to respond – under US law, it does not have to.  
 
“Employers can make their anti-union case loud and clear in the workplace, while banning union reps from company property,” said Pier. “That’s hardly a free and democratic election climate, and it would be unfair in any political contest.”  
 
Wal-Mart’s relentless anti-union drumbeat creates a climate of fear at its US stores. Many workers are convinced that they will suffer dire consequences if they form a union, in part because they do not hear pro-union views. Many are also afraid that if they defy their powerful employer by organizing, they could face retaliation, even firing.  
 
Human Rights Watch found that Wal-Mart heightens this fear with its arsenal of unlawful anti-union tactics. Wal-Mart has sent managers to eavesdrop on employees. According to former workers and managers at one store, it has even ordered the repositioning of surveillance cameras to monitor union supporters. It has told workers they will lose benefits if they organize. The company has discriminatorily banned talk about unions and prohibited union flyer distribution, while allowing discussion of other issues and circulation of non-union materials. It has disciplined union supporters for policy violations that it has let slide for union opponents. And it has illegally fired workers for their union activity.  
 
Penalties under US labor law are so minimal that they have little deterrent effect, and Wal-Mart only receives a slap on the wrist when found guilty of illegal conduct. In most cases, offending employers must simply post in-store notices promising to abide by the law in the future and must restore the status quo before the illegal acts, for example by rehiring wrongfully fired workers and paying them lost earnings. They face no fines or punitive sanctions.  
 
Denied the right to form unions, Wal-Mart workers have been unable to join forces to raise their concerns that the company may be forcing out long-term employees, address their struggles to make ends meet on Wal-Mart wages, or call for an end to high healthcare costs.  
 
A key way to improve protections for worker organizing would be for the US Congress to pass the Employee Free Choice Act (EFCA) and the Bush administration to sign it into law. The EFCA, which passed the US House of Representatives in March and is now under consideration in the Senate, would increase penalties for labor law violations. And it would help restore a democratic union selection process by requiring employers to recognize a union if a majority of workers signs cards showing their support. Currently, employers can force union elections and then intimidate workers with their aggressive anti-union message during the campaign period.  
 
Human Rights Watch also urged the National Labor Relations Board, charged with enforcing US labor law, to seek more court injunctions when allegations of serious employer misconduct arise, particularly against repeat offenders such as Wal-Mart.  
 
Human Rights Watch called upon Wal-Mart to cease all tactics, both legal and illegal, that undercut workers’ right to organize and to go a step further as an industry leader and pledge neutrality on union formation.  
 
For its report, Human Rights Watch interviewed 41 current and former Wal-Mart workers and managers from US stores where organizing had occurred since 2000. Some supported the union; some were opposed; others were ambivalent. Human Rights Watch also contacted Wal-Mart three times in writing to request meetings and obtain the company’s views. Wal-Mart refused to meet and provided only very limited responses.  
 
“Wal-Mart should change its anti-union behavior,” said Pier. “When companies like Wal-Mart can regularly violate US workers’ right to organize, they threaten a fundamental right and one that the government is duty-bound to uphold.”  

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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

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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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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