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FEI Research Foundation

The publicity surrounding corporate financial failures is promoting efforts to improve ethical business practices and corporate governance. Establishing a corporate code of conduct is the cornerstone for both an effective ethics program and corporate governance process. In recent months, regulators have supported, if not spurred on, these efforts.

Current events have given organizations an opportunity to reevaluate, reemphasize, and reeducate employees and the public at large on the company code of conduct. For companies to establish a more formal code of conduct and ethics program, or even to improve existing ones, the tone must be set at the top. Effective standards for ethical conduct must be initiated, supported, encouraged, and practiced by top management. With assistance from practitioners, the Financial Executives International (FEI) Research Foundation discusses some examples of corporate ethics programs and codes of conduct below.

Current Events

Following a February 2002 board of directors meeting and discussions with Securities and Exchange Commission Chairman Harvey Pitt, the New York Stock Exchange established the Corporate Accountability and Listing Standards Committee. The committee is charged with reviewing the listing requirements involving corporate governance.

On March 19, 2002, FEI followed suit with the announcement of a 12-point plan intended to strengthen financial reporting and corporate governance. An important focus of the plan is to escalate the commitment to ethical conduct in business; FEI offered three recommendations on how to do so.

Initially, all financial executives should adhere to a specialized code of ethical conduct. This code should be extended to finance, accounting, tax, and the investor relations staff. FEI has held up its own code of conduct as an example. The code of conduct calls for members to avoid actual or apparent conflicts, provide timely understandable information, comply with regulations of private and public regulations, and act in good faith while proactively promoting ethical behavior at work and within their communities. Additionally, FEI advocates that companies actively promote ethical behavior and provide employees with the means to report perceived violations of ethical standards without fear of reprisal.

Nasdaq supports FEI's efforts. In an April 11, 2002, letter to the chairman of the SEC, the chairman and CEO of Nasdaq specifically recommended that companies adopt a code of conduct. The letter stated that the code "should be approved by the company's board and, at a minimum, address conflicts of interest and compliance with applicable laws. Companies should also adopt board-approved procedures for monitoring compliance with their codes.¹"

Nasdaq is currently reviewing Nasdaq proxies to determine how many companies have voluntarily adopted the code. Nasdaq also established the Nasdaq Listing and Hearing Review Council to evaluate "potential actions to strengthen corporate governance." Based on the council's recommen-dations, Nasdaq announced several rule changes to its corporate governance on May 24, 2002.

Existing Codes of Conduct

Code-of-conduct issues could include political contributions and public service involvement, misrepresentation and false statements, employee discrimination and harassment, competition, safety and the environment, and employee relationships and conflicts of interest. For example, CSX Corporation's code of ethics specifically addresses all of these issues. Parsons Brinckerhoff (PB) is also updating its long-standing ethical conduct standards to address international office concerns and to integrate affirmation of the code with Foreign Corrupt Practices Act (FCPA) compliance policies. Many companies have an existing code of conduct that generally applies to all employees. Some codes actively address employees' concerns about reprisal, such as that of the Great Atlantic & Pacific Tea Company, Inc. (A&P) and Cardinal Health, Inc., which includes a hotline for employees to call to report concerns and potential code violations.

Cardinal's hotline goes one step further and states that the outside company managing the hotline will share the information with Cardinal authorities within 24 hours. Its code also offers guidelines for identifying fraudulent activity and states procedures for reporting irregular activity to company management.

Providing options, such as the hotline, for reporting violations is necessary, particularly when a company code calls for employees to refer to their immediate manager to report wrongdoing.

Specifically, if the manager is suspected of violating the code, the employee will need alternative guidance on how to deal with a problem. In this regard, Weyerhaeuser defines a three-step issue-resolution process, presenting employees with choices for reporting misconduct. In its standards of business conduct, Harris Corporation also directs employees to seek additional assistance from legal counsel, the employee's business standards advisor (BSA) or the corporate director of business conduct.

There are a variety of ways for companies to present code-of-conduct issues. Smaller nonpublic companies may have concise, straightforward codes of conduct. For example, Wiremold, a private manufacturing company, has a one-page summary, while Washington Inventory Service, an international supplier of inventory and business solutions, has a three-page standard of conduct document that is integrated into the company's human resources policy manual.

More elaborate codes of conduct and accompanying formal ethics programs are also in place. At Cardinal, in addition to the anonymous ethics hotline, the company has identified a team of corporate officers that make up the corporate responsibility office. As part of its annual certificate of compliance process, Cardinal requests some employees "to certify that they are aware of and in compliance with the company's policies on ethical behavior."

PB also requires a company-wide affirmation of its conduct code. This annual affirmation process requires all employees, nonemployee directors, and members from its international advisory board to sign a document signifying that they have read, understood, and complied with the code. Harris also requires its employees to sign and submit a form (part of the standards-of-business-conduct booklet) that acknowledges receipt and understanding of the code.

Many conduct codes cover issues that are industry-specific. Under sections titled Customer Gifts/Medicare Fraud and Relations With Government Agencies, Cardinal's ethics guide identifies situations where state and local institutions or Medicare fraud and abuse regulations may be more restrictive. In a section on patient medical records and prescription data, the company reviews policies on when patient records can and cannot be disclosed to others.

Similarly, A&P's industry-specific issues refer to policies on premiums and prizes related to supplier contests and acceptance of vendor samples.

Parsons Brinckerhoff's industry-specific issues deal with the work product, payments, claims, and contract terms related to subcontractors.

PB executives pointed out that when dealing with government agencies, employees might be subjected to further rules or regulations. For example, some clients' gift rules prohibit PB employees from accepting even a cup of coffee. Consequently, awareness of both internal and external standards of conduct is necessary and continually promoted. PB executives also note that in the engineering and construction industry, there is heightened potential for perceived conflict of interest due to the variety of related parties and vendor relationships. In response, PB's code addresses conflicts of interest as they relate to both personal and professional ethics. These sections state that PB will avoid both any actual association that conflicts with employment or compromises judgment and any association that hints at such appearance.

Cardinal's ethics guide also addresses conflicts of interest and provides guidance in preventing conflicts related to business with family members, ownership in other businesses, outside employment, gifts and gratuities, and consultants and agents. Namely, the company provides the following question that employees should ask of themselves, "If all the facts were known, would someone question my objectivity or my ability to make the right decision for the company?"

Defining Code of Conduct and Ethics Programs

As evidenced in the previous examples, there is no one-size-fits-all code of conduct. The Novartis Foundation for Sustainable Development provides three "criteria for the formulation of corporate codes of conduct:

• The principles of the code must be tailored to the specific corporate culture - merely taking over general codes is not enough.
• The code of conduct addresses those activities of the corporation which are particularly sensitive or which concern the greatest vulnerability (legal, sociopolitical, and others).
• Corporate codes of conduct have to be pragmatic, i.e., they must reflect the circumstances of the corporation and should only set standards which can reasonably be expected to be followed.²"

At a minimum, an ethics program should be designed to meet the compliance effectiveness criteria provided by the Federal Sentencing Guidelines, namely:

• Compliance standards and procedures must be established to deter crime.
• High-level personnel must be involved in oversight.
• Substantial discretionary authority must be carefully delegated.
• Compliance standards and procedures must be communicated to employees.
• Steps must be taken to achieve compliance in establishment of monitoring and auditing systems and of reporting systems with protective safeguards.
• Standards must be consistently enforced.

Any violations require appropriate responses, which may include modification of compliance standards and procedures and other preventive measures.³

However, ethics programs should strive t o do more than comply. Past research suggests that good ethics programs and good compliance programs are interdependent; each is incomplete without the other. A good compliance program must emphasize values and moral responsibility, because this increases the program's effectiveness among employees. A good ethics program must help employees to know and obey the law if it is to have any relevance to the company in its actual environment.

The establishment of a mission or vision and values statement can assist companies in defining the scope of their ethics programs. For example, Weyerhaeuser's Guidelines for Business Conduct defines the company's Business Ethics Core Policy and details expectations, responsibilities, and consequences of noncompliance. A mission statement can also assist a company in defining the broader areas to be addressed in the code. An analysis of competitor codes of conduct can provide additional guidance as to what areas may be more relevant for one company's environment versus another.

Suggestions provided by the Ethics Resource Center include:

Use ethics codes to guide, not intimidate, employees.

Obtain employee input through interviews, focus groups, or surveys.

Distribute draft codes for general employee review.

Perform pilot testing in select locations prior to rollout.

Address laws, rules, and regulations that may be specific to an industry or location (e.g., FCPA, Federal Sentencing Guidelines).

Contemplate cultural issues specific to international offices.

Companies should periodically review a code after its initial establishment. Changes in company strategies, industry trends, laws, regulations, and regional offices may initiate the need to revise a code of conduct.

Conclusion

For companies with plans to establish a more formal code of conduct and ethics program or to improve existing ones, the tone must be set at the top. Effective standards for ethical conduct must be initiated, supported, encouraged, and practiced by top management.

Furthermore, a code of conduct cannot be effective if it is not adequately communicated and explained. Today's technology provides various cost-effective methods for communicating an ethics code. These communication efforts should be provided in a steady stream even after the initial awareness campaign.

The past chairman for the Canadian Centre for Ethics and Corporate Policy states, "Ethical conduct creates good will and trust. This can be the edge a business or other organization needs to succeed in our increasingly competitive world."

As a PB executive succinctly put it, "Having a code [of conduct] is good for business. It costs more not to have it. Just do it. Have a code and mean it."

Endnotes

¹ Nasdaq letter to the SEC, April 11, 2002, http://www.nasdaqnews.com/ news/pr20 02/corporate%20governance.pdf

² Leisinger, KM, "Corporate Ethics and International Business: Some Basic Issues" http://www.foundation.novartis.com/business_corporate_ethics.htm, Novartis Foundation for Sustainable Development (June 2, 1994)

³ Murphy, Diana E., "The Federal Sentencing for Organizations: A Decade of Promoting Compliance and Ethics," Iowa Law Review (January 31, 2002), pp. 703-704.