IS YOUR ORGANIZATION PREPARED TO HANDLE A POTENTIAL SCANDAL?
The board’s role in establishing effective ethics programs
// BY MIKE McGRATH
BAD THINGS CAN HAPPEN TO GOOD COMPANIES
It’s been a busy 2006 so far for the multinational conglomerates. GE pays $11.5 million after allegedly covering up the sale of defective turbine blades to be used in jets and military helicopters. IBM is accused of price-fixing with SAP in Hungary and fined millions. Honeywell pays $2.6 million for failing to test sensitive equipment sold to the U.S. Department of Defense. Even corporations with overt commitments to a compliance and ethics program like these still find themselves in hot water for potential criminal misconduct.
ONE IN TEN COMPANIES CRIMINALLY INVESTIGATED?
With more than 100 stock option backdating investigations, increased scrutiny of international trade practices, and new laws to be followed, experts estimate that between 2005 and 2006 nearly one in ten Fortune 1000 companies, or more, may find themselves under investigation by state or federal authorities.
When the investigators come calling, and proof of misconduct is found, what happens next depends on whether a company has an “effective compliance and ethics program” in place and has met the evaluation and oversight criteria of the Principles of Federal Prosecution memo issued by the Department of Justice in 2003. When a company cannot demonstrate commitment to an ethics-based compliance program, it risks prosecution. However, when a company has met criteria for an effective ethics program, not only may fines and penalties be reduced, but oftentimes prosecution can be entirely avoided.
SARBOX DOESN’T ADDRESS MOST CRIMINAL MISCONDUCT— THE BOARD IS RESPONSIBLE
Lost in the hubbub of Sarbanes-Oxley is the fact that this law has largely been about restoring faith in the accuracy of financial statements. What Sarbanes-Oxley does not address are the many other elements of criminal behavior which frequently occur and leave the company and its leadership exposed. Price-fixing or collusion with a competitor, violations of the Foreign Corrupt Practices Act, and false claims to the government on products or billing are just a few examples of misconduct that can be carried out by just a single employee. Such actions can lead to criminal charges for the organization and its leadership.
An effective ethics program as defined by the government, however, can offer an invaluable defense, as well as prevent problems. Elements of such a program in regard to the board include: (1) the board specifically must be knowledgeable about the content of the compliance and ethics program and how it works; (2) the organization must train the board on its compliance standards and procedures; and (3) the board must evaluate whether the ethics program is sufficient and effective.
“It’s incredulous when a company gets into trouble and it turns out that the board has absolutely no idea about the compliance and ethics program, having confused government-recommended ethics programs with Sarbanes-Oxley,” says one former federal criminal prosecutor. “Many investigations will result in avoidable and unnecessary liability exposure for boards and the companies that they oversee.”
Oh and about GE, IBM and Honeywell? They weren’t criminally prosecuted. One reason was that all three organizations have generally met the criteria of an “effective compliance and ethics program.” A free download of a sample board of director training curriculum is available at ethisphere.com/boardtraining.
