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Chapter 9Chapter 9
Managing andControlling EthicsProgramsManaging andControlling EthicsPrograms
Part Four
ImplementingBusiness Ethicsin a GlobalEconomy
Five factors can impact success of ethicsprograms
1.The content of the code of ethics
2.The frequency of communication regardingthe ethics program
3.The quality of communication
4.Senior management’s ability to incorporateethics into the organization
5.Local management’s ability to do the same
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Organizations must focus onimplementation and planning an ethicsprogram
Should be part of strategic planning andmanagement activities
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Proper selection of employees
Ethics training
Structural and communication systems
Ethics assistance line
Help desk
Management’s commitment to the program
Comparing standards against actual behavior
Ethics audit
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A systematic evaluation of an organization’s ethicsprogram and performance to determine whether itis effective
Regular, complete, and documented measurementsof compliance with policies and procedures
Can be a precursor to establishing an ethics program
Should be the most important part of an ethicsprogram
Primary purpose is to identify risks and problems inactivities and plan steps to adjust/correct/eliminateconcerns
Recent legislation encourages greater ethics audits
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The process of accessing and reporting abusiness’s performance in fulfilling itseconomic, legal, ethical, andphilanthropic responsibilities expected bystakeholders
Broader in scope than an ethics audit
An ethics audit might be a component
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Detect misconduct before it becomes a majorproblem
Identifies potential ethical issues andimprove legal compliance
Improve organizational performance
Improve relationships with stakeholders whodemand greater transparency
Sets goals against which to measure actualperformance
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Top Challenges
For CEOs
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N = 729 total responses. Responserate varied for each challenge.
Source: The Conference Board, CEOChallenge® 2013 Summary Report,2013.
1.Human capital
2.Operational excellence
3.Innovation
4.Customer relationships
5.Global political/economic risk
6.Government regulation
7.Global expansion
8.Corporate brand and reputation
9.Sustainability
10.Trust in business
Plans to respond to and recover fromdisasters that can disrupt operations,destroy organizational reputation, anderode shareholder confidence
Involves…
Contingency planning
Assessing organizational risks
Planning for potential occurrences
Providing tools to respond
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Ethical misconduct disasters progress instages
Ethical issue recognition
The decision to act unethically
Organization’s discovery of and response to theact
Anticipation of and intervention can stave offorganizational disasters
Formal mechanisms in place to detect risk
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Improving OrganizationalImproving Organizational
Risk ManagementRisk Management
Source: Ernst & Young, Risk Management for Asset Management: Ernst & Young Survey 2012 , 6–7,http://www.ey.com/Publication/vwLUAssets/2012_EMEIA_asset_management_risk_survey/$FILE/Risk_Management_for_AM_EY_Survey_2012.pdf (accessed May 14, 2013). 23715_
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1.Create a Regulatory Reform Project Management Office with theappropriate governance to direct business and operating models andmanage risks proportionately.
2.Chief Risk Officers should report to Group CROs or board members.
3.Involve risk and compliance at the beginning of the productdevelopment cycle.
4.Improve independent controls by setting appropriate governanceframeworks with which portfolio managers need to comply.
5.Manage and optimize the use of capital.
Nonfinancial performance measures arecrucial to a firm’s health
Measure wholeness and soundness of a company
“Return on integrity”
Many organizations and regulatoryframeworks offer a means of capturingethical performance
Structural
Behavioral
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Description ofDescription of
Measuring ToolsMeasuring Tools
Source: “Balanced Scorecard Basics,”Balanced Scorecard Institute,http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx (accessed May 14,2013); “What is Six Sigma,” iSix Sigma, http://www.isixsigma.com/index.php?option=com_k2&view=item&id=1463:what-is-six-sigma?&Itemid=155 (accessed May 14, 2013); “Triple bottom line,” The Economist , November 17, 2009,http://www.economist.com/node/14301663?story_id=14301663 (accessed May 14, 2013). 23715_ch09_lores_239-271.indd 24929/07/13 1:21 PM
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MeasurementSystems
Description
BalancedScorecard
Developed by Drs. Robert Kaplan and David Norton, the Balanced Scorecardincorporates nonfinancial performance indicators into the evaluation systemto provide a more “balanced” view of organizational performance. The systemuses four metrics—financial, internal business processes, learning and growth,and customer—to measure the overall performance of the firm.
Six Sigma
Six Sigma focuses on improving existing processes that do not meet qualityspecifications or that need to be improved as well as developing new processesthat meet Six Sigma standards. To meet Six Sigma specifications, the processmust not produce more than 3.4 defects per million opportunities.
Triple BottomLine
This approach to measuring social, financial, and environmental factors (orpeople, places, and planet) recognizes that business has a responsibility topositively influence a variety of stakeholders, including customers, employees,shareholders, community, and the natural environment. The challenge is howto evaluate a business’s social and environmental impacts, since there are nouniversally standard forms of measuring these criteria.
Six Sigma
Balanced Scorecard
Triple Bottom Line
Global Reporting Initiative
AccountAbility AA1000 framework
Open Compliance Ethics Group
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AA 1000 Framework forAA 1000 Framework for
Ethics and Social AccountabilityEthics and Social Accountability
Source: Adapted from AccountAbility AA1000 Series of Standards, http://www.accountability21.net/aa1000series (accessedMarch 12, 2009). Reprinted with permission of The Institute of Social and Ethical Accountability.
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AA 1000 Framework forAA 1000 Framework for
Ethics and Social AccountabilityEthics and Social Accountability
Source: The Open Compliance Ethics Group Framework Overview, http://www.oceg.org/framework.asp (accessed April4, 2006). Reprinted with permission.
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May uncover ethical problems a companydoes not wish to disclose
May reveal a problem that cannot beremedied
Stakeholders may be dissatisfied with theinformation
Conducting ethics audits requires financialand record keeping resources
No guarantee that auditing is the solution
Lack of standardization in auditing
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Audits should be unique to each company
The following steps provide a generalframework…
Secure management and board commitment
Establish an ethics audit committee
Define the scope of the audit
Review organizational mission, goals, and values
Collect and analyze relevant information
Verify the results through an outside agent
Report the findings
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Framework for anFramework for an
Ethics AuditEthics Audit
Sources: These steps are compatible with the social auditing methods prescribed by Warren Dow and Roy Crowe in WhatSocial Auditing Can Do for Voluntary Organizations (Vancouver: Volunteer Vancouver, July 1999), and Sandra Waddock andNeil Smith in “Corporate Responsibility Audits: Doing Well by Doing Good,” Sloan Management Review 41 (2000), 79.
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•Secure the commitment of top managers and board of directors
•Establish a committee to oversee the ethics audit
•Define the scope of the audit process, including subject matterareas important to the ethics audit
•Review the organization’s mission, policies, goals, and objectivesand define its ethical priorities
•Collect and analyze relevant information in each designatedsubject matter area
•Have the results verified by an independent agent
•Report the findings to the audit committee and, if approved, tomanagers and stakeholders
The first step in the auditing process
Sarbanes-Oxley requires that boards ofdirectors provide oversight
The board may initiate audits
Managers may request an ethics audit toimprove confidence in a firm’s reportingprocesses
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Model Corporate SocialModel Corporate Social
Responsibility StructureResponsibility Structure
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The second step in the auditing process
Boards of directors financial audit committeeshould oversee the audit
Managers or ethics officers conduct it in mostfirms
Internal and external parties should beinvolved
External auditors should not have otherconsulting or conflict-of-interest relationshipswith top managers or board members
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The ethics audit committee should establishthe scope of the audit and monitor itsprogress
Scope is determined by the type of business,risks faced, and the opportunities to manageethics
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An ethics audit should…
Include a review of the current missionstatement and strategic objectives
Examine all formal and informal documentsthat make commitments with regard toethical, legal, or social responsibility
A firm should define its ethical priorities atthis time
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Identify tools for measuring progress inimproving employees’ ethical decisions
Collect relevant subject matter
Internal and external documents
Determine a baseline level of compliance
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Determine all commitments
Stakeholders yield insights
Integrating stakeholder feedback is crucial in anaudit
Audits should compare organizationalperformance to other comparableorganizations
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Green Mountain Coffee’sGreen Mountain Coffee’s
Code of EthicsCode of Ethics
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Source: Adapted from GMC’s Code of Ethics,http://investor.gmcr.com/documentdisplay.cfm?DocumentID=7206 (accessed May 14, 2013).
•Respect the rights and the property of others
•Maintain accurate records and report unethical behavior
•Comply with all laws, rules, and regulatory requirements
•Avoid conflicts of interest and any appearance of impropriety
•Be responsible stewards in the use, protection, and management of GMCR’s assetsand resources
•Understand antitrust laws and uphold fair competitive practices
•Share GMCR’s story while following the Media Relations guidelines on consistentcommunications
•Act with integrity while maintaining the confidentiality of GMCR information
•Support GMCR’s purpose, Principles, Policies, and Procedures and encourageGMCR’s business partners to do so as well
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Where Cultures are Weaker,Where Cultures are Weaker,
Misconduct is More PrevalentMisconduct is More Prevalent
Source: Ethics ResourceCenter, 2011 NationalBusiness Ethics Survey:Workplace Ethics inTransition (Arlington, VA:Ethics Resource Center,2012), 20.
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Have an independent party verify the resultsof the analysis
Companies often have results independentlyaudited
Verification is an assessment of the quality,accuracy, and completeness of a company’ssocial report
Should involve standard procedures to controlreliability and validity of information
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The final step in the auditing process
Spells out the purpose and scope of the audit,methods used, role of the author, and auditingand reporting guidelines
May be disseminated internally or externally
Ethics audits are similar to financial audits, butforms are different
Unqualified opinion
Qualified opinion
Adverse opinion
Disclaimer of opinion
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Should be conducted regularly
Provides a benchmark of overall effectivenessof ethics initiatives
Can be important in asset allocation and programdevelopment
Can demonstrate the positive impact ofethical conduct and social responsibilityinitiatives on the firm’s bottom line
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