FIGURE 5.1

MAP OF CORPORATE STAKEHOLDER ACCOUNTABILITY

Shareholders

Activists

Governments

Creditors

Lenders

Suppliers

Customers

Employees

Corporation

Others, including the Media, who can be affected by or who can

affect the achievement of the corporation’s objectives

PUBLIC INTEREST

SHAREHOLDERS + OTHER STAKEHOLDERS

CORPORATE CULTURECreated by ManagementLeads to Corporate Actions

FeedbackGuidance

All Interests Accountability = Financial & Strategicincluding

Ethical & Legal

Sets Vision, Mission,Strategy, Policies,Codes, Compliance,Feedback,Compensation

Appoints CEO, CFO

BOARD OF DIRECTORSExternalAuditors

Lawyers

FinancialReports

EthicsOfficer

Whistle-Blowers

ProfessionalAccountants

IncludingInternal Auditors

FIGURE 5.2

STAKEHOLDER ACCOUNTABILITY ORIENTED GOVERNANCE PROCESS

PUBLIC INTEREST

SHAREHOLDERS + OTHER STAKEHOLDERS

FeedbackGuidance

Accountability = Financial & Strategic including Ethical & Legal

All Interests

CORPORATE RISK ASSESSMENT

Prepared by management for Board review and approval

CORPORATE CULTURECreated by ManagementLeads to Corporate Actions

ValuesBeliefsMotivationActions

IntegrateInto CorporateValue System

& Actions

Assess & Rank All Interests

Identify AllStakeholders

Sets Vision, Mission,Strategy, Policies,Codes, Compliance,Feedback,Compensation

Appoints CEO, CFO

BOARD OF DIRECTORS

FIGURE 5.3

STAKEHOLDER INTERESTS RANKING, RISK ASSESSMENT, AND USAGE

Policies, CodesReinforcement

ReportsObservations

CORPORATE CULTURECreated by ManagementLeads to Corporate Actions

ValuesBeliefsMotivationActionsOtherInfluences

ValuesTransmission

StakeholderEvaluation

CorporateValue System

IdentificationAssessment

Rank

StakeholderInterests

CorporateValue System

FIGURE 5.4

ALIGNING VALUES FOR ETHICAL MOTIVATION AND ACTION

Sphere/Culture Basis of Value-System

North American Rights-based: rights, justice, utility

Sino-Confucian Duty-based: obligation to family

Japan Duty-based: obligation to company

Middle East Duty-based: obligation to savior

Europe Personal rights

South America Duty-based: obligation to family, religious values

Impact Evident On: Dealing with people…hiring, gender

Bribery

Motivation for doing business

Short- or long-term time horizons

Importance of quality-of-life issues

Hypernorm Values: Honesty, Fairness, Compassion, Integrity,

Predictability, Responsibility

TABLE 5.1

CULTURAL VALUES AND HYPERNORMS

Governance and objectives

Areas of impact

Reputation Assets, revenues, costs Performance Stakeholders

Sources of risk

Environmental Strategic Operational Informational

Specific hazards

Degree of control over risk–little, some, great deal

Documentation

TABLE 5.2

AREAS OF CORPORATE RISK ASSESSMENT

Normal definitions of risk are too narrow forStakeholder-oriented accountability and governance

An ethics risk exists wherethe expectations of a stakeholder may not be met.

Discovery and remediation are essential in order toavoid a crisis or the loss of support of stakeholders.

Assign responsibility, develop annual processes, board review

TABLE 5.3

ETHICS RISK MANAGEMENT PRINCIPLES

SpecialNon-P Interests

Decision Maker(D) has a duty to

act/judge in P’s best interest

P’s Satisfaction basedon Fulfillment of

P’s Interests

A decision maker (D) “has a conflict of interest if, and only if

1) D is in a relationship with another (P) requiring D to exercise judgment in P’s behalf and

2) D has a special interest tending to interfere with the proper exercise of judgment in that relationship.

FIGURE 5.5

CONFLICT OF INTEREST FOR A DECISION MAKER

Non-existent Apparent Imaginary

Decision Point

Potential Actual

FIGURE 5.6

TYPES OF CONFLICT OF INTEREST

How might judgment be swayed … Any interest, influence, loyalty, concern, emotion, or other feature tending to make judgment less reliable than normal

Self-interest … Bribes, kickbacks – payments or property to decider, family, designees Gifts, free travel, favors, Special advantages – non market discounts on goods Special treatment – flattery, social involvement Dealings with family, relatives, or relations

Fraud ... Misappropriation of funds or property Cheating on expense accounts Falsifying documents Stealing cash, assets, or resources Falsifying results to obtain bonuses, merit pay, or promotion

Misunderstanding … Confused signals or incentives Boss/everybody’s doing it Cultural differences

Slippery slope … Where a small favor leads to ever larger demands

TABLE 5.4

CAUSES OF CONFLICTING INTERESTS

Steps To Be Taken

Ensure awareness through: Codes of conduct and Related initial and ongoing training

Create a program and an understanding of: Employer’s concerns regarding conflict of interests Major issues:

Avoidance is preferable Slippery slope Management techniques:

Annual sign-off, confirmation review and compliance Guidelines for gifts, behavior Counseling, reporting, reinforcement Chinese walls/firewalls, scrutiny

TABLE 5.5

MANAGEMENT OF CONFLICTING INTERESTS

1. Is it nominal or substantial?

2. What is the intended purpose?

3. What are the circumstances?

4. What is the position of sensitivity of the recipient?

5. What is the accepted practice?

6. What is the firm/company policy?

7. Is it legal?

TABLE 5.6

GUIDELINES FOR ACCEPTANCE OF GIFTS OR PREFERENTIAL TREATMENT

ELEMENTS OFORGANIZATIONAL CULTURE

Assumptions Values Narratives Symbols Heroes Rites, Ceremonies,Rituals

REINFORCERS OFORGANIZATIONAL CULTURE

Mission/Vision Leadership skills Growth/Development Opportunities Team Development Communication Performance Management Systems Incentives and Rewards Human Resource Systems

A Model of the Impact of Organizational Culture on Individual/Team Outcomes and Organizational Effectiveness, The Business Case for Culture Change, W. Reschke & R. Aldag, Center for Organizational Effectiveness, August 2000.

FIGURE 5.7

ORGANIZATIONAL CULTURE, INDIVIDUAL/TEAM OUTCOMES, AND ORGANIZATIONAL EFFECTIVENESS

Job/Career Satisfaction Organizational Identification Job Involvement Commitment Discretionary Effort Job Performance

INDIVIDUAL/TEAMOUTCOMES

Market Share Profitability Achievement of Formal Org. Goals

ORGANIZATIONALEFFECTIVENESS

Attendance Turnover Productivity Work Quality Recruiting Success

SECOND LEVEL Creativity/Innovation Problem Solving Team Cohesiveness and Communication

THIRD LEVEL

FIRST LEVEL

ORIENTATION PRIMARY FOCUS

Compliance-based Preventing, detecting, and punishing violations of the law

Integrity or Values-based Defines organizational values and encourages employee commitment

Satisfaction of external stakeholders

Improvement of image with and relationships with external stakeholders (customers, the community, suppliers)

Protect top management from blame

“CYA” or cover your ___

Combinations of the above Values- and compliance-based, for example

SOURCES: Treviño, Weaver, Gibson and Toffler, 1999, 135-139; Paine, 1994, 111; Badaracco & Webb, 1995, 15 .

TABLE 5.7

ETHICS PROGRAM ORIENTATION TYPES

An ethical culture combines formal and informal elements to guideemployee thought and action, including:

Ethical leadership by executives and supervisors* Reward systems incorporate ethical considerations* Perceived fairness, fair treatment of employees* Open discussion of ethics in the organization* Authority structure that emphasizes an employee’s accountability and responsibility to question his or her own actions, and an obligation to question authority when something seems wrong* Organizational focus that communicates care for employees and the community, rather than self-interest Official policies and procedures (code of ethics, practice, conduct) Supporting offices (e.g. ethics officer, ombudsperson) Supporting structures (e.g. telephone hotline, whistle-blower protection, code sign-off, training, etc.,)

* Most influential factors as found by Treviño et al.

TABLE 5.8

ETHICAL CULTURE: IMPORTANT ASPECTS

1. Formal ethics codes

2. Ethics committees developing policies, evaluating actions, investigating and adjudicating policy violations

3. Ethics communications systems

4. Ethics officers or ombudspersons coordinating policies, providing education, or investigating allegations

5. Ethics training programs to raise awareness and help employees respond to ethical problems

6. Disciplinary processes for unethical behavior

TABLE 5.9

ETHICAL PROGRAMS’ USUAL DIMENSIONS

RESPONSE TO: MY ORGANIZATION … FORMALLY INFORMALLY UNSURE NOT AT ALL

Has a code of conduct that articulates the values and standards of the organization

77% 10% 10% 3%

Has a senior-level ethics compliance officer 51% 7% 32% 10%

Performs background investigations on prospective employees

60% 10% 23% 7%

Provides communication and training to employees on its code of conduct

69% 17% 8% 5%

Has a confidential and anonymous hotline that employees can use to report misconduct or seek advice.

48% 6% 24% 22%

Audits and monitors employees and managers compliance with its code

44% 23% 24% 10%

Has policies to hold employees and managers accountable for code of conduct violations

65% 12% 17% 7%

Provides incentives for employees to uphold the code of conduct

23% 13% 28% 37%

Has policies to investigate and take corrective action if misconduct is alleged 65% 11% 18% 8%

TABLE 5.10

PRESENCE OF PROGRAM ELEMENTS PER KPMG INTEGRITY SURVEY 2005-2006

PERCEPTION OR BEHAVIORWITH ETHICS PROGRAM

BETTER OVERALL

Observed - Misconduct in prior 12 months 6% 59%

- Violations of organizational values and principles in the prior 12 months 12% 43%

Preventing Misconduct – Feel pressures to do whatever it takes to meet targets 10% 50%

- Lack understanding of standards that apply to their jobs 9% 53%

- Believe policies and procedures are easy to bypass or override 16% 40%

- Believe rewards are based on results, not the means used to achieve them 16% 41%

Detecting Misconduct – Would feel comfortable reporting misconduct to a supervisor 40% 88%

- Would feel comfortable reporting misconduct to legal department 48% 73%

- Would feel comfortable reporting misconduct to internal audit 44% 63%

- Would feel comfortable reporting misconduct to board of directors 39% 59%

Responding to Misconduct – Believe appropriate action would be taken 43% 87%

- Believe they would be protected from retaliation 46% 75%

- Believe they would be satisfied with the outcome 44% 68%

- Believe they would be doing the right thing 27% 92%

Perceived Tone & Culture – CEO & other top execs set the right “tone at the top” 55% 84%

- are approachable with ethical concerns 43% 76%

- value ethics & integrity over short-term business goals 54% 82%

- would respond appropriately if became aware of misconduct 50% 86%

Team Culture & Environment – People feel motivated to “Do the right thing” 39% 90%

- People feel comfortable raising and addressing ethics concerns 49% 85%

- People apply the right values to their decisions and behaviors 37% 90%

- People share a high commitment to integrity 41% 90%

- The opportunity to engage in misconduct is minimal 42% 80%

- The willingness to tolerate misconduct in minimal 49% 84%

TABLE 5.11

ETHICS PROGRAMS AFFECTS ON BEHAVIORS AND PERCEPTIONS, per KPMG INTEGRITY SURVEY 2005-2006

STEP PURPOSE

Assign responsibility: Chairman or CEO Ethics officer Ethics committee

Successful initiatives usually involve: top level accountability and adequate budget champions, arbiters monitoring, feedback, advice and cheerleading

Ethics Audit To understand the organization’s ethical practices, and its network of stakeholders and interests

Ethics risk assessment To identify important ethics problems that could arise (Ch6)

Top management support Absolutely vital to successful adherence

Develop consensus on key ethical values Necessary to frame policies and procedures

Develop code of conduct, ethical decision-making criteria and protocols incl. sniff tests

Provide guidance for employees and all other stakeholders

Develop ethics program: Leaders involvement Launch Training Reinforcement policies: Compliance Sign-off Measurements of performance Include in strategic objectives and managers objectives Include in monitoring and reward structures Communications programs Exemplar award system Ethics inquiry service Crisis management

To successfully present and provide supporting mechanisms for the guidance process

Information, investigation and whistle-blower protection To ensure that ethics are part of survival reactions

Establish a review mechanism

TABLE 5.12

DEVELOPMENT AND MAINTENANCE OF AN ETHICAL CORPORATE CULTURE

Credo Inspirational short statement on key values

Code of Ethics Deals with ethics principles (short)

Code of Conduct Deals with principles plus additional examples, etc.

Code of Practice Detailed rules of practice

TABLE 5.13

DEPTHS OF CODE COVERAGE

UNITEDSTATES CANADA EUROPE

LATIN AMERICA JAPAN

Instrumental 64% 30% - 50% 17%

Stakeholder 5 10 30 - 17

Legal Compliance 14 - - 25 33

Values/Mission 14 40 60 25 33

None 2 20 10 - -

N = 72

TABLE 5.14

DOMINANT RATIONALES FOR CODES BY REGION

GUIDANCE PROVIDED CONTROL/MOTIVATION SIGNALED

Obey these rules Imposed Control

Seek advice before acting

Act on your best judgment, but disclose what you have done

Guiding principles that indicate “this is what we are and what we stand for” Self-control

SOURCES: Clarkson & Deck, 1992, Clarkson, Deck & Leblanc, 1997.

TABLE 5.15

CODE GUIDANCE ALTERNATIVES AND THE CONTROL/MOTIVATION SIGNALED

Ethical principles – honesty, fairness, compassion, integrity, predictability, responsibility

Respect for stakeholder rights, and duties owed to each stakeholder

Vision, mission, and key policies tied into the above

Ethical decision-making frameworks, sniff tests, rules of thumb, and guidance on making trade-offs between competing objectives

When to seek counsel, and whom to seek it from

Specific topics found in over 5 percent of employee, supplier, and joint venture codes:

Bribery/improper payments or influences Conflict of interest Security of proprietary information Receiving gifts Discrimination/equal opportunity Giving gifts Environmental protection Sexual harassment Antitrust Workplace safety

Political activities Community relations Confidentiality of personal information Human rights Employee privacy Whistle-blowing and protection programs Substance abuse Nepotism Child labor

SOURCE: The Conference Board Research Report, Global Corporate Ethics Practices, 1999, 29.

TABLE 5.16

SUBJECTS FOUND IN CODES

Anti-bribery legislation – U.S. Foreign Corrupt Practices Act of 1977 This Act provided an early motivation for codes

U.S. Sentencing Guidelines of 1991 Brought provision for “Due Diligence” defense

Environmental responsibility: Acid rain, air pollution, ozone depletion (U.N. Brundtland Commission Report of 1987) New Environmental Protection statutes Exxon Valdez oil tanker spill triggers Valdez (now CERES) Principles

Fair treatment for: Employees: Feminism: sexual harassment, equal opportunity for pay and promotion Minorities: discrimination* Health, safety and well-being Supplier employees – no sweat shop or child labor Drug problems – privacy vs. safety Whistle-blowers** Customers – buyer beware slowly becomes seller beware Health & safety concerns – auto recalls (see Ford, Firestone case) Ethical consumerism, quality Shareholders: Misuse of inside information Conflict of interests Mandate and operations are ethical – Enron’s banks engage in transactions without economic substance designed to mislead

* See Texaco’s Jelly Bean case in Chapter 7.** See GE case described in reading by Andrew Singer in Chapter 1.

TABLE 5.17

EXTERNAL SHOCKS AND INFLUENCES TRIGGERING CODE MODIFICATION

1. A written environmental policy, made known to appropriate employees

2. Operating practices which guard against environmental malfeasance, including contingency plans tocover mishaps to ensure full scale, timely clean-up

3. Employees briefed on their duties and responsibilities under the policy, as well as their potential personal liability, and the liability of others

4. Employees informed of legal requirements, including notice to government complete with a contact list

5. A person who is primarily responsible for environmental matters and monitoring compliance

6. Consideration of an environmental audit or consultation with an expert to start the protectionprocess and monitor progress

7. Monitor pollution control systems and report mishaps on a timely basis

8. Regularly review reports on compliance, potential problems environmental charges, conviction andemployee training

9. Management that keeps abreast of new legislation, makes an internal review of compliance andadvise directors of the results, and allocates a real and satisfactory budget to achieve these features

TABLE 5.18

ESSENTIAL FEATURES TO DEMONSTRATE A DUE DILIGENCE DEFENCE IN RESPECT OF ENVIRONMENTAL MATTERS

Compliance encouragement Awards, bonuses Inclusion in performance reviews, remuneration decisions, and promotion Reprimands, suspension, demotion, fines, dismissal

Monitoring Ethics audit or internal audit procedures Reviews by legal department Annual sign-off by all or some employees Employee surveys

Facilitation of reporting of wrongdoing Assurance of a fair hearing process Protection: absolute confidentiality, whistle-blower protection plan Counselling/information: ombudsperson program, hotline, human resources Committee oversight assured: ethics committee of board, audit committee

TABLE 5.19

MECHANISMS FOR COMMPLIANCE ENCOURAGEMENT, MONITORING, AND REPORTING WRONGDOING

CRITERIA FOR DETERMINING DEGREE OF CULPABILITY AND MITIGATION OF PENALTY

Specifically, the amended guidelines call on organizations to:

• Promote a culture that encourages ethical conduct and a commitment to compliance with the law

• Establish standards and procedures to prevent and detect criminal conduct

• Ensure the board of directors & senior executives are knowledgeable & exercise reasonable oversight of the compliance/ethics program

• Assign a high-level individual within the organization to ensure the organization has an effective compliance and ethics program, and delegate day-to-day operational responsibility to individuals with adequate resources authority, and direct access to the board

• Use reasonable efforts and exercise due diligence to exclude individuals from positions of substantial authority who have engaged in illegal activities or other conduct inconsistent with an effective compliance and ethics program

• Conduct effective training programs for directors, officers, employees & other agents & provide such individuals with periodic information appropriate to their respective roles & responsibilities relative to the compliance & ethics program

• Ensure that the compliance & ethics program is followed, including monitoring & auditing to detect criminal conduct

• Publicize a system, which may include mechanisms for anonymity and confidentiality, whereby the organization’s employees & agents may report to seek guidance regarding potential or actual misconduct without fear of retaliation

• Evaluate periodically the effectiveness of the compliance and ethics program

• Promote and enforce consistently the compliance and ethics program through incentives and disciplinary measures

• Take reasonable steps to respond appropriately to misconduct, including making necessary modification to the compliance/ethics program

TABLE 5.20U.S. SENTENCING GUIDELINES ETHICS CRITERIA per KPMG INTEGRITY SURVEY 2005-2006

GRI – Global Reporting InitiativeA framework for economic, social and environmental reporting.

AA1000 – AccountAbilityAn assurance standard designed to provide assurance on the quality of an organization’s public reporting and the quality of its underlying systems and processes.

FTSE4Good FTSE4Good is an index made up of companies judged acceptable using an objective global

standard for socially responsible investment. The FTSE4Good Selection Criteria cover 3 areas: - Working towards environmental sustainability - Developing positive relationships with stakeholders - Upholding and supporting universal human rights

Domini 400 Social index 400 predominantly U.S. corporations are ethically screened on 11 criteria and included in the

index for use by ethical investors.

The Jantzi Social Index Similar to the Domini and FTS4Good indices for 400 Canadian companies that are socially and

environmentally screened.

SA 8000 – Social Accountability International (SAI)SAI is developing the SA 8000 standard to provide guidance with regard to workplaceconduct and specifically with regard to sweatshops. Auditors are also trained.

See the text’s website for links to these resources.

TABLE 5.21

EMERGING PUBLIC ACCOUNTABILITY STANDARDS AND INITIATIVES