Compliance and Ethics: Dependent on Each Other

1. Compliance and Ethics: Dependent on Each Other MARKKULA CENTER Eric Pressler March 22, 2006

2. Key topics • Federal Sentencing Guidelines-2004 Changes • Values Only – Inadvertent Violations • Legal Only – Almost Anything Goes • Program Elements - The Overlap • The Bottom Line

3. Federal SentencingGuidelines – 2004 Changes Linking culture to legal compliance —To have an effective compliance and ethics program for purposes of credit under the Guidelines an organization shall ……promote an organizational culture that encourages ethical conductand a commitment to compliance with the law.

4. Values Only – Inadvertent Violations Values only approach - • Lack of compliance risk assessment, so management unclear on compliance risks. Management unfocused. • Lack of compliance training opens door to inadvertent violations due to poor understanding of rules. • Lack of compliance auditing, so management is unaware of problems. No corrective action. • Poor or inconsistent controls lead to potential violations. A values focus promotes the right culture, but some tools are missing. Compliance violations damage reputation, raise costs, and undermine values program.

5. Legal Only –Almost Anything Goes Legal only approach – • Unclear values allows some to abuse legal loopholes • Legal interpretations in grey areas of law are pushed to limit without values to guide actions. • The lack of clear values potentially damage relations with customers and other stakeholders. • Non-legal risks emerge in areas such as gifts, procurement, and employee interactions. Legal only focus promotes compliance with the letter of the law, but lack of clear values damages reputation, raises costs, and undermines compliance program. (Enron?)

6. Program Elements – The Overlap Helpline • Compliance Program - Reporting potential violations and guidance on laws and regulations. • Values Program – Reporting potential ethics and policy violations. Guidance on ethics and policy issues. C&E Training • Compliance Program – Training to the corporate-wide audience on key requirements and expectations. • Values Program - Training to the corporate-wide audience on key requirements and expectations.

7. Program Elements – The Overlap Officer Committee • Compliance Program – Provides guidance for corporate-wide program. Fulfills FSG oversight responsibilities. Sets tone at top. • Values Program – Provides guidance for corporate-wide program. Fulfills FSG oversight responsibilities. Sets tone at top. Board • Compliance Program – Fulfills FSG oversight responsibility. • Values Program - Fulfills FSG oversight responsibility.

8. Program Elements – The Overlap Code of Conduct • Compliance Program – Generally addresses top compliance risks. FSG and stock exchange requirement. • Values Program – Key document to communicate values and policies. Risk Assessment • Compliance Program – Corporate-wide review and prioritization of legal and regulatory risk. • Values Program - Corporate-wide evaluation of key ethics and policy issues.

9. Program Elements – The Overlap Auditing and Monitoring • Compliance Program – Review of actual compliance with laws and regulations • Values Program – Surveys, focus groups and other tools evaluate aspects of corporate culture.

10. The Bottom Line It’s essential to focus on both rules driven (compliance) and values driven (ethics) elements in developing an effective program. Neither effort works well without the other. Both efforts share many program elements. www.ethicalleadershipgroup.com