Kardell Paper

1. Kardell Paper • Who are Kardell’s stakeholders? • Are their claims equally important? • What factors would you suggest the Board consider in its decision? • Did the Board make any mistakes? Why? • Apply moral imagination for a better decision? Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

2. Governance & Management Issues “Business ethics is the strategic management of trustworthy corporations, management of conflicts of interest and management of risk without increasing the risks to which people or the environment may be exposed, unknowingly or unwillingly.” Max Clarkson October 14, 1997 Legal reinforcement: TSE, CICA, US Sent., Caremark Nat’l Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

3. Governance After Enron • Outrage, crisis of credibility, political and regulatory action accelerated • Canada - April 2002: TSE adopts most recommendations of Joint TSE/CICA Report of Nov. 2001, OSC watching US • US - SEC, NYSE, NASDAQ, President and Congress/Senate race to put forward proposals leading to Sarbanes-Oxley Act • Boost to ethical governance approach Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

4. Emerging Governance Trends • Independence of Directors…judgement, role • Chair//CEO, Audit Committee, … • Clarification of responsibil. of Directors, Officers • Responsibilities for oversight, strategies, compliance, internal culture, ethics, broader risk management, competencies (financial literacy), performance measures • Transparency • CEO, CFO sign-off annual and quarterly fin. statements, compensation, stock options approved, additional disclosures… risks, internal control, … • Clarified legal liability – CEO, CFO, Directors • Independence of Auditors • not some consulting services, rotation of partners Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

5. TSE Rule Changes, Dec. 31, 2002 • Board approval of strategic plan - risks, opportunities • Provide Board mandate: • Limits for Board & management; Provisions for shareholder feedback • Communications Policy - dealings with analysts and investors • Disclosure on directors: related, composition, minority • New Directors: full board participation in determin.of skill sets • Assessments: • Board assessments - responsibility for and frequency • CEO assessments • Directors meetings without management present • Audit Committee: • all financially literate, at least one expert • Charter of powers and responsibilities Canadian Governance Review, April/May 2002 Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

6. Sarbanes-Oxley Act, July 30, 2002 Interesting coverage: • Audit Committees - anonymous whistle-blowing • Code of Ethics for senior financial officers • No material misstatements or omissions • Public Company Accounting Oversight Board • Conflicts of Interest in audit services Financial Reporting Release, PricewaterhouseCoopers, August 2002 Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

7. A New Governance Paradigm Stakeholder: • Accountability • Dependency Puts a Premium on: • Reputation Management • Ethics Risk Assessment • Corporate Citizenship • Ethics Management Mechanisms Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

8. Latest Accountability Pressures In the UK: • FTSE4Good Index of Screened Stocks • Europe, Canada, US data • Covers 3 years • Working towards environmental sustainability • Developing positive relationships with stakeholders • Upholding and supporting universal human rights • www.FTSE4Good.com.... • CSR investment requirement coming Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

9. Latest Accountability Pressures In the U.S. • Global Reporting Initiative (GRI) • www.globalreporting.org... • Framework – eco., environ., social report • Social Accountability International (SAI) • Workplace standard and reporting • SA8000 • www.cepaa.org... Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

10. Governance & Ethical Risk Lessons learned about ethical problems from: Union Carbide, Ford Pinto, Intel’s Pentium Chip, Shell Brent Spar,Texaco’s Jelly Beans, Tylenol Recall... • Significant strategic impact, now and in future • Awareness & pre-planning could have eliminated • Culture dependant • Specific governance initiatives needed Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

11. Governance Mechanisms 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 Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

12. 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 Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

13. Reputation ManagementA New Stakeholder-Based Model Competitive Advantage Top Management Values Strategic Plan Organizational Processes Identity Reputation __Stakeholder Screen__ Values__PrinciplesEmotion Honesty Trustworthiness Trust Fairness Compassion Integrity Credibility Respect Predictability Reliability Responsibility Responsibility Media Image Image Management Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

14. Creating The Right Culture • Culture = the way we do things around here • Culture = broader values + normative patterns which guide employee behavior ...(Ouchi, 1979) • Consider a proactive ethical culture • Leadership • Requires respect for pure ethical values made practical Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

15. 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 Ethical Operating Values Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

16. Ethics Program Orientation Types OrientationPrimary 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: Trevino, Weaver, Gibson and Toffler, Cal. Mgt. Rev., 1999, and Paine, HBR, 1994, 111; Badaracco & Webb, 1995, 15. Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

17. Code Guidance Alternatives - Control/Motivation Signaled Guidance Provided Control/Motivation Signaled Obey these rules Imposed Control Seek advice before acting Act on your best judgement, but disclose what you have done Guiding 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 Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

18. Patterns of Ethics Statements/ Corporate Codes Organizing Focus Characteristics Stakeholder/constituent Introduction + discussion by stakeholder of principles, objectives and policies Strategic policy or Foreword by CEO, chair, president + introduction, responsibility purpose, objectives, policies, mgt. philosophies Issues–oriented or One issue after another corporate mission Description Depth of Coverage Credo Inspirational short statement on key values Code of Ethics Deals with ethics principles (short) Code of Conduct Deals with principles + additional examples, etc. Code of Practice Detailed rules of practice Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

19. Principles of Stakeholder Management Ethical performance should be managed to maintain support of the stakeholders: • Acknowledge & monitor concerns • Listen & communicate • Adopt sensitive processes and behavior • Recognize interdependence • Work cooperatively • Avoid jeopardizing inalienable human rights • Acknowledge potential conflicts Clarkson Centre Publication, 1999 Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

20. Measurement: Why Bother? • 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, labor, ISO • Stakeholder interest • Creation of a competitive image • Website: www.globalreporting.org for GRI initiative Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003

21. Development and Maintenance of An Ethical Corporate Culture Step Purpose Assign responsibility: Successful initiatives usually involve: Chairman or CEO top level accountability and adequate budget Ethics Officer champions, arbiters Ethics Committee 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 Top management support Assess – absolutely vital to success Develop consensus on key ethical values Necessary to frame policies and procedures Develop code of conduct, ethical decision Provide guidance for employees & all other stakeholders making criteria & 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; Include in strategic objectives & managers objectives; Measurements of performance; Include in monitoring and reward structures Communications programs; Exemplar award system Ethics inquiry service Information, investigation & whistleblower protection Crisis management To ensure that ethics are part of survival reactions Establish a review mechanism Prof. Len Brooks, Rotman School of Management, University of Toronto, 2003