TOWARD AN ETHICAL CULTURE Characteristics of an Ethical Organization

1. TOWARD AN ETHICAL CULTURE Characteristics of an Ethical Organization Kirk O. Hanson Business and Organizational Ethics Partnership Markkula Center for Applied Ethics Santa Clara University April 5, 2007 (Revised with input from Partnership Members)

2. Importance of Identifying Characteristics of an Ethical Organization • Enables us to create most effective culture of integrity • Learn where each element can go wrong • Identify items to include in ethical risk analysis • Create checklist to meet expectations of prosecution and sentencing guidelines

3. New Sources of Ethics Best Practices • Learning by the best companies • Sarbanes Oxley Act (2002) • Stock Exchange Standards (rev.2003) • Sentencing Guidelines (rev. 2004) • DOJ Principles of Prosecution (rev. 2006)

4. Clarify Values Model Values Communicate Values Discuss Difficult Ethical Cases Compliance: Audit Enforce Discipline Create Systems to Embody Values Continuous Monitoring of Behaviors Governance System Renew Values Regularly Best Practices for a Culture of Integrity Copyright 1984,2007 Kirk O. Hanson

5. Best Practice Elements • Statement of values • Code of conduct • Example of senior executives • Training and repeated communication of values and standards • Systems which embody the values

6. Best Practice Elements, cont. 6. Continuous evaluation of behaviors 7. Effective hotline system 8. Mechanism for resolving toughest cases 9. Compliance enforcement system 10. Periodic renewal process for values and standards 11. Governance system for ethics and values

7. Values Statements • Best Practice • Grows out of experience of company • Broad input to identification of values • One pager • Where It Can Go Wrong • Words, not values “in action” • Unrelated to company decisions, actions • Deliberate misreading of meaning • Ignores reality of global operations

8. Codes of Conduct • Best Practice • Organized and comprehensive • Applies to all employees • Annual signoff • Examples, Q and A • Where It Can Go Wrong • Impenetrable, looks like legal wrote it • Captures last year’s trivia • On the shelf and never consulted • Exemptions (routinely) granted • Deliberate misreading meaning, gaming it • Unclear application outside US

9. Executive Modeling • Best Practices • CEO a walking embodiment of values – in both public and private life • CEO talks about the values • CEO tells stories about putting values to work • Where It Can Go Wrong • CEO behaves at odds with values • CEO private behavior inconsistent • CEO ‘pleasures’ himself with corporate funds • CEO never mentions values • CEO demonstrates disdain for employees

10. Training and Communication • Best Practices • Constant communication about values • New hire training in values • Regular and engaging training in values • Training that focuses on recent issues • Training that emphasizes responsibility of individuals • Training that helps employees know how to raise issues • Where It Can Go Wrong • Lack of follow-up to assure it is done • Obvious lip service regarding values • Snickering references by managers • Reductionist approach to training - do the least • Don’t really expect employees to risk raising issues

11. Systems that Embody Values • Best Practices • Performance evaluation system has explicit reference to values • Repetitive systems have values categories • Key decisions examined in light of values • Where It Can Go Wrong • “Fuzzy stuff” in performance ignored • Systems exist but ignored • Some systems deliberately left out • Key decisions made by purely financial criteria • Performance pressures drive out values

12. Systems that Embody Values • Ernst & Young’s list of systems/operations to be addressed: • People processes • Recruiting • Orientation • Performance objectives and measures • Global people survey • Learning and development • Client-related processes • Proposals • Engagement planning • Client acceptance • Balanced Scorecard • Quality and risk management function • Corporate social responsibility function

13. Continuous evaluation of behaviors • Best Practices • Annual survey on peer and boss behavior • Identification of problem areas via survey • Identification of problem areas via hotline reports • Identification of problem areas by executive team • Explicit discussion of problem areas in ethics governance process and in executive meetings • Where It Can Go Wrong • Lack of trust in survey, confidentiality • Poorly drawn survey • Lack of candidness about problem areas • Failure to engage executives in assessment

14. Hotlines and Helplines • Best Practices • External and credible reporting • Anonymity possible; no retribution • Effective system for follow-up • Effective system for investigation • Where It Can Go Wrong • Lack of employee understanding of function • Lack of empathy in those answering phone • Violation of anonymity; retribution • Lack of adequate follow-up

15. Way to Discuss Difficult Ethics Cases • Best Practices • Transparency exists regarding tough cases • Employees confident they can take tough case to boss and actually get help • Top executives take tough ethics cases seriously • Mechanism or place exists for vetting cases • Employees confident that they will not be penalized for raising issues, implementing values • Employees believe they may be rewarded for raising issues • Executive culture encourages raising issues with CEO • Where It Can Go Wrong • “Don’t ask” culture; deniability • Fear of negative management reaction • Unwillingness of executives/managers to share burden • Failure to apply ethics commitments to global operations

16. Compliance Enforcement • Best Practices • Audit everything that is important • Put compliance in context; one dimension of value commitment • Investigation and enforcement thorough and respectful • Discipline appropriate and just • Where It Can Go Wrong • Compliance is the whole of the values message • Compliance and discipline easier on executives • Compliance system protects only the company

17. Periodic Renewal • Best Practices • Periodic “rolling out” of values and standards – usually a 3 year cycle • Freshness of message for each renewal • Engagement of organization in fresh message • Where It Can Go Wrong • Letting the messages go stale; unchanged • Failure to seek input from organization for revisions • Failure to address recent incidents; new issues • Overemphasis on recent incidents

18. Governance of Ethics and Values • Best Practices • Senior executive overseeing ethics effort • Qualified and motivated Ethics officer • Active audit or ethics committee of board • Periodic reporting to board • Real and deliberate learning from experience • Continuous adjustments to ethics and values systems • Where It Can Go Wrong • Assignment to lower level executive • Ethics officer not respected • Audit committee not really interested • Reporting is perfunctory • Failure to apply to global operations • No real expectation that reports will lead to improving system