L.J. Brooks, Rotman School of Management, University of Toronto 1

Enron Case Debrief

Group discussion: What ethical problems caused the

Enron fiasco? Who was responsible? How could the problems have been

prevented? Class discussion and debrief

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Overview of Key Problems Governance failure at the Board level:

Too much trust Incompetence - awareness and/or

understanding of role , control & reporting systems

Lack of motivation, conflicts of interest Dishonest management, conflicts of interest Culture of deception, self-interest Manipulation of accounting and disclosure Poor standard setting Auditor deficiencies Regulatory short-sightedness

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Ethical Impacts Greater awareness of ethical issues Greater general and specific

accountability and responsibility Governance from the top - board More likelihood of discovery Higher reputational risks Ethics programs will have to work

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Governance Paradigm Changes

Stakeholder Accountability…DependencyPuts a Greater Premium on:

Ethics awareness and risk assessment Ethics guidance and culture Ethics strategies and programs Ethics management mechanisms Ethics compliance mechanisms and feedback

Need for an ethical culture/ethics program

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Enron’s Culture… Ethical? Ethical… what’s ethical?

Does it foster actions that respect the interests & rights of

stakeholders?

Does it meet the expectations of stakeholders?

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Building an Ethical corporate culture/Ethics program

Strategic focus - comprehensive, directive Assign responsibility Identify and assess risks and opportunities Code of conduct - values, guides Governance & reporting - explicit part, time,

energy Measurement of performance Ethics audits and targeted programs Management of ethical risks & opportunities

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Ethical culture supports guidance To offset vulnerabilities:

directors reputation internal control

An Ethical Culture Begins with Ethics Risk

Assessment

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Unethical Culture… Vulnerabilities

Director’s & Officer’s Concerns Strategic risks - reputation Innovation risks - trust Recruiting, retention risks Performance risks - morale Accountability risks - integrity Compliance risks - internal control

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Identify & Assess Risks & Opportunities

Part of strategic planning process Assessment of possible impacts and

interests of present and projected stakeholders in short-, medium-, and long term time horizons Part of MBO and unit annual objectives Internal and external horizon scans Crisis management planning & rating systems

Feed-forward to board and strategic planning processes

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What is an Ethics Risk?An Ethics Risk occurs when …

stakeholder expectations may not be met a difference may develop between

organizational, employee and stakeholder values

time is a factor because stakeholders are members of dynamic networks

consider gap analysis

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Reputation ManagementA New Stakeholder-Based Model

StrategicPlan

TopManagement

Values

OrganizationalProcesses Identity

Reputation

CompetitiveAdvantage

__Stakeholder Screen__Values__ Principles EmotionHonesty Trustworthiness TrustFairnessCompassionIntegrity Credibility RespectPredictability ReliabilityResponsibility Responsibility

Media

Image

ImageManagement

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New Board Responsibilities Comprehensive Risk Management

Broad understanding of business model Financial literacy Guidance & Control framework Focus on corp. culture, ethics & reputation Business ethics…whistleblower protection

plan Ethics Risk Management

Trust, but challenge, don’t turn away Caremark National Case, trend

© L. Brooks

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Comprehensive Risk Management requires understanding the business

Risk Events Causing Drops of Over 25% Share Value,Percentage of Fortune 1000 companies, 1993-1998

Strategic ……………………………. 58%Customer demand shortfall (24) Competitive pressure (12)M & A Integration problems (7) Mis-aligned products (6)

Operational …………….31%Cost overruns (11) Accounting irregularities (7)Management ineffectiveness (7) Supply chain pressures (6)

Financial ………..6% [Foreign macro-eco, interest rates ]Hazard …….0% [Lawsuits, natural disasters]

Source: Mercer Management Consulting/Institute of Internal Auditors, 2001

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Comprehensive Risk Management includes Ethics Risk Management

Ethics Risk Reputation SuccessReputation is important Arthur Andersen…………… survival RT Capital…………reputational capital Tylenol ……………competitive advantage

Selling trust and credibility, not pills, …

© L. Brooks

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Comprehensive Risk Management depends upon the

Corporate Ethical Culture Comprehensive Risk Management utilizes both:

A. Key risk factor identification & measurementB. Review of key business processes including the

ethical culture that underpins process integrity Ethical culture provides guidance for employees

about when to adhere to the Code, when actions are not covered in Code, in a grey area, or in a crisis - tools to measure ethical culture do exist

Enron’s Board failed to consider fully!Few corporations do A, fewer do B!

© L. Brooks

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Creating The Right Culture

Culture = the way we do things around here Culture = broader values + normative

patterns which guide employee behaviour ...(Ouchi, 1979)

Consider creating a proactive ethical culture Leadership Based on sound ethical values

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Identifying Ethical Operating Values

PURE ETHICAL VALUES

Respect for rights of individual stakeholders

Fairness between stakeholders

Maximize overall benefits

ETHICAL OPERATING VALUES

Honesty, integrity, accuracy, recognition of stakeholder rights incl. environment

Control of self-interest

Profit is our goal , but not at any cost

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Corporate Citizenship OptionsChris Marsden, Business & Society Review, Spring 2000, Vol. 105:1, 9-25, p. 17.

Corporate Citizenship Company Objectives

Denial Reactive Engagement

Pro-active Engagement

Triple Bottom Line Environmental Social Financial

7

8 Reactive Holistic Engagement Impact assessment, Risk analysis Stakeholder partnership building ‘Hard reporting’

9 Active Sustainability Leadership Triple bottom line accountability and audit, integrated management systems

Shareholder Value

4 Devolved External Affairs PR/sponsorship Local community investment

5 Reactive Partial Engagement ISO 14001 SA 8000 Policy statements ‘Soft reporting’

6 Pro-active Partial Engagement Stakeholder partnership building Pioneering new code of conduct or monitoring system

Managerial Satisficing

1 Discretionary Philanthropy Chairman’s wife

2 Specialist Reporting To CEO % club, Co. Foundations

3 Specialist Intervention in Societal issues Strategic Philanthropy

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Ethics Program Orientation Types

Orientation Primary FocusCompliance-based Preventing, detecting, and punishing

violations of the law Integrity or Values-based Defines organizational values and

encourages employee commitmentSatisfaction 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: Trevino, Weaver, Gibson and Toffler, Cal. Mgt. Rev., 1999, and Paine, HBR, 1994, 111; Badaracco & Webb, 1995, 15.

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Code Guidance Alternatives: Control/Motivation Signaled

Guidance Provided Control/Motivation Signaled

Obey these rules Imposed ControlSeek advice before actingAct on your best judgement, but disclose what you have doneGuiding principles which indicate “this is what we are and

what we stand for” Self-control________________________________________________________________Sources: See reading by Clarkson & Deck, 1992, or Clarkson, Deck & Leblanc,

1997. Website: www.nortelnetworks.com/corporate/community/ethics/index.html

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Patterns of Ethics Statements/ Corporate

Codes Organizing Focus CharacteristicsStakeholder/constituent Introduction + discussion by stakeholder of

principles, objectives and policiesStrategic policy or Foreword by CEO, chair, president, introduction, responsibility purpose, objectives, policies, mgt. philosophiesIssues–oriented or One issue after another corporate mission

Description Depth of CoverageCredo Inspirational short statement on key

valuesCode of Ethics Deals with ethics principles (short)Code of Conduct Deals with principles + additional examples, etc.Code of Practice Detailed rules of practice

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Principles of Stakeholder Management

Ethical performance should be managed to maintain support of the stakeholders:

Acknowledge & monitor concerns Listen & communicate

Adopt sensitive processes and behaviour Recognize interdependence

Work cooperatively Avoid jeopardizing inalienable human rights

Acknowledge potential conflictsClarkson Centre Publication, 1999

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Emerging Risk-oriented Decision Criteria for Directors

Criteria (New) Interests/Risks Considered

Profitability & legality …… Shareholders +

Fairness & rights …… Specific Stakeholders

Expectations Gap ………. the Public Interest

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Compliance requires Measurement

If you can’t measure it, you can’t manage it Ethics/Corp. Social Performance (CSP) feedback

Company objectives Personal objectives Reinforcement decisions Evaluation of management

Compliance disclosures - environment, labour, ISO Stakeholder interest Creation of a competitive image Website: www.globalreporting.org for GRI

initiative

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CSP Measurement/Reporting Techniques

Descriptive analysis (CEM, LJB list) Numerical indicators Expenditure analysis Cost-benefit analysis Categorization: Problems:

Which impacts? Objectivity, surrogate measures Comprehensiveness... Credibility

Examples: Levi Straus...

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Dow Corning Breast Implant Case

A company with a highly regarded ethical culture and an ethics audit process: Mindset:

Scientific, self-interest, support needed from culture

Ethics Audit Process Flaws … Commitment: strategic & continuing “Vanity product”

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Ethics Audits & Programs

Ethics audits provide assurance that operations are ethical (in accord with ethical principles), & assess risks Use investigative techniques:

Dow Corning’s, CEM’s reporting dimensions Observation, surveys, sniff tests Governance review (E & Y), Reputation Mgt. (PwC)

Use whistleblowing & complaints as red flags Ethics programs - Pollution reduct., family life, child care Mechanisms for buy-in Website: www.cepaa.org for SA8000 audit approach

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Publicly-Available Corporate Social Audits

Social Audit BP Amoco (UK) Ford (US) Heritage

Credit(Can) HBO Origin (Swed.) Metro Credit (Can.) Sbn Bank (Switz.)

Partial List August 2000

Externally Verified Ben & Jerry’s (US) Novo Nordisk (Den.) Shell Int’l (Neth.) Body Shop Int’l (UK) Cooperative Bank

(UK) Van City Savings

Credit Union (Can.)

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Development and Maintenance of An Ethical Corporate Culture

Step PurposeAssign responsibility: Successful initiatives usually involve: Chairman or CEO top level accountability and adequate budget Ethics Officer champions, arbiters Ethics Committee monitoring, feedback, advice and cheerleadingEthics Audit To understand the organization’s ethical practices,

and its network of stakeholders and interestsEthics Risk Assessment To identify important ethics problems that could arise Top management support Assess – absolutely vital to successDevelop consensus on key ethical values Necessary to frame policies and proceduresDevelop code of conduct and ethical Provide guidance for employees & all other stakeholders decision making criteria and protocols incl. sniff tests.Develop ethics program: To successfully present and provide supporting Leaders involvement mechanisms for the guidance process Launch & subsequent 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 Information, investigation and whistleblower protection Crisis management To ensure that ethics are part of survival reactionsEstablish a review mechanism