Creating an Effective Ethics and Compliance Program

1. Creating an Effective Ethics and Compliance Program Ascentis User GroupSeptember, 2005

2. Key Points • Why Create an Ethics and Compliance Program? • How Do I Create an Ethics and Compliance Program?

3. Why Create an Ethics and Compliance Program?

4. Rise in Corporate Scandals • Adelphia founder fined $715 million, hands over billion in assets to compensate investors for fraudulent behavior • Boy Scout executive resigns after falsifying minority membership numbers to collect additional funding

5. Rise in Corporate Scandals • Morgan Stanley pays $54 million in sex discrimination case • Nature Conservancy cited for unethical sales of land • Marsh & McLennan fined $850 million for illegal practices

6. New Government Regulations • Sarbanes-Oxley Act of 2002 • U.S. Organizational Sentencing Guidelines

7. Sarbanes-Oxley: Major Provisions • Restrictions on Auditors • New responsibilities and powers for the Audit Committee of the Board • Increased responsibilities for Officers and Directors • Strengthened disclosure requirements • New whistleblower protections

8. Sarbanes-Oxley: Major Penalties • Subjects to fine or imprisonment (up to 25 years) any person who knowingly defrauds shareholders of publicly traded companies • Mail and wire fraud penalties increased (from 5 to 25 years in prison) • Penalties for violations of the Employee Retirement Income Security Act of 1974 increased (up to $500,000 and 10 years in prison) • Establishes criminal liability for failure of corporate officers to certify financial reports • Increases penalties for violations of the Securities Exchange Act of 1934 to up to $25 million dollars and up to 20 years in prison

9. U.S. Organizational Sentencing Guidelines • Provides incentives for development of corporate compliance programs • Reduction of fines for compliance • 2004 revisions require changes to most corporate compliance programs

10. U.S. Organizational Sentencing Guidelines 2004 Revisions: Major Provisions • Requires an effective program that promotes an ethical culture • More specific requirements for the Board and top management • New emphasis on training

11. U.S. Organizational Sentencing Guidelines 2004 Revisions: Major Provisions • Encourages employees to seek guidance, not just report wrongdoing • Requires companies to periodically assess the risk of criminal conduct

12. Business Benefits • Reinforce your positive reputation and gain a competitive advantage • Create a more productive workplace environment • Gain loyalty from employees • Create successful relationships with vendors and communities • Fulfill customer requirements

13. How To Create an Ethics and Compliance Program

14. Executive Commitment • Buy-in at the top will create buy-in throughout the company • CEO and Execs must be role models • Consider the ethical impacts of every decision • Communicate publicly about ethical decisions and commitment to ethics • Walk the Talk

15. Ethics and Compliance Program • Key Elements: • Ethics Committee or Ethics Officer • Code of Conduct • Reporting channels, tracking and investigation • Training for all employees

16. Ethics Committee/Ethics Officer • Responsible for managing program elements • Reports to the Audit Committee at least once a year • Investigations coordinated and outcomes tracked • Direct access to the Board is essential

17. Code of Conduct • Summary of 11 to 15 company policies, e.g. • Prevention of Harassment • Conflicts of Interest • Use of Company Resources such as Email, and Handling of Confidential Information • Quick reference manual • Plain language and clarifying Q&A • References and where to report issues

18. Reporting Mechanism • New regulations require reporting directly to the Audit Committee • Generally accomplished in half year intervals (some only once per year) for routine reports • Establish several avenues for reporting • Ethics Office, Anonymous Helpline, Ombudsman, Web site • Publicize them widely

19. Investigation and Follow-Up • Employees fail to report because they believe that “nothing will be done/change” • Investigation and follow-up are tangible evidence that ethics issues are taken seriously • Report to senior management about investigations and outcomes • Audit committee must be informed

20. Employee Training and Communication • U.S. Sentencing Guidelines • Minimum once per year training for all employees • At-risk groups additionally on specific topics • Training “as appropriate for agents” • Sarbanes-Oxley • Companies see training and communication as way of mitigating risk posed by Sarbanes

21. Employee Training and Communication Communicate. Communicate. Communicate.

22. Employee Training and Communication • Conflicts of Interest • Area of risk for profit and nonprofit entities • Board members must be independent • Report any potential conflicts of interest annually • Panel on Non-Profit Sector recommendations: • nonprofit boards must disclose potential conflicts • formal training at least once per year

23. Ethics and Compliance Program Benefits • Avoid fines and jail terms • Gain a competitive advantage • Be known for “Doing the Right Thing”

24. Creating an Effective Ethics and Compliance Program Ascentis User GroupSeptember, 2005