Doing the right thing in business is getting more attention these days in light of a myriad of accounting scandals that caused the downfall of several large corporations, criminal investigations, and indictments of dozens of top executives.
As part of the landmark Sarbanes-Oxley accounting reform law passed in 2002, companies are required to disclose whether they have adopted a code of ethics.
For most companies, having a code on their books, and making sure both its employees and customers are well aware of it, is a no-brainer.
Among public companies that he’s worked for on a consulting basis, Robert Putrus said most already had a code in place. But they’ve recently publicized it more, he added.
“They’ve made it tougher, more explicit, and are better communicating it to their rank and file,” said Putrus, who is president of the San Diego chapter of the Institute of Management Consultants.
One of the key provisions of Sarbanes-Oxley is that the public company’s top two officers, the chief executive and chief financial officer both must sign all financial documents, making them personally liable for any uncovered fraud or errors.
That fact, as well as increasing scrutiny applied by federal regulators, has caused many firms to go above and beyond the letter of the law by doing such things as hiring corporate governance officers, and providing training on ethics issues to workers.
Titan Corp., the San Diego defense contractor that saw its reputation sullied and was prevented from completing the planned sale of the firm in 2004 because of admitted bribery violations, hired a compliance and ethics officer in September.
The company had an ethics officer, but elevated and expanded the position to address violations of the Foreign Corrupt Practices Act Titan admitted in March to following a more than a yearlong investigation by both the Department of Justice and the Securities and Exchange Commission.
The hiring of David Danjczek to the newly created position was also part of a settlement with both agencies that involved a fine of $28.5 million, the highest ever levied against a company involving violations of the FCPA.
As part of an overhaul of Titan’s ethics program, Danjczek developed ethics training for each of Titan’s 12,000 employees. The sessions take about three hours.
Just Do The Right Thing
“We know our employees are doing the right thing, but we want to stress that we want our employees to do the right thing the first time and every time,” Danjczek said from his office in Washington, D.C.
In addition, the company updated its code of conduct and outlined expected ethical conduct for a host of issues, including expense reports, conflicts of interest, the acceptance of gifts, gratuities and entertainment, confidential or inside information, employment of relatives, and political contributions.
Among the violations detailed in its settlement, Titan admitted to funneling $2.1 million in “social payments” to the re-election campaign of the president of the West African nation of Benin.
Danjczek also oversees Titan’s whistle-blower hot line that provides employees with an avenue to lodge complaints or allegations of possible illegal activities they may witness or know of.
In general, the trend by many companies is toward publicizing a firm’s dedication to honest business practices, with CEOs taking the lead in getting the message across to everyone, said several local consultants.
“The key is to get the values off the wall and into the hall,” said Ken Majer, the president of Majer Strategies Inc., a San Diego-based corporate and management consulting firm.
Jerry Sebby, the CEO at KRC Rock, a San Marcos-based provider of natural stone and boulder to contractors, said he hired Majer for four sessions to help KRC define the company’s core values.
Although KRC previously had a list of core values, Sebby thought it would be good to go through the process again. By hashing the code out with all 60 of KRC’s employees, the four identified values (integrity, respect, great attitude and teamwork) are probably “taken more to heart, and better portray who we are,” Sebby said.
“The list of values that we came up with aren’t just hanging on up on a wall. They’re used and considered when we make decisions and how we approach things,” he said.
Majer said breaking down sometimes-abstract language into real life expectations, and then rewarding those who put the values into action, helps ensure the ethical message takes hold with all employees.
“What you want is to translate the principles that have been developed into expectations, and when you find someone doing something right, you reward and recognize them for those behaviors,” Majer said.
Improving The Bottom Line
Beyond the fact that espousing and practicing honest business ethics sounds laudable, many companies are finding it’s also benefiting the bottom line.
Sean Culbert, a managing director of compliance for BearingPoint, the consulting firm formerly belonging to KPMG, said organizations that understand the spirit of Sarbanes-Oxley and create a robust culture of compliance are generally better regarded in the investment marketplace.
“Companies with ethics policies in place are worth more money,” Culbert said. “Those firms that may disclose a material weakness, and what they are doing to correct such deficiencies are generally perceived more favorably because the company has an operating structure in place to deal with problems.”
While it is difficult to delineate what companies are spending to comply with ethical provisions of Sarbanes-Oxley, spending for the reporting and testing internal control systems for some larger companies is running into the millions of dollars, Culbert said.
At Accredited Home Lenders Corp., a San Diego-based mortgage lender, the company updated its ethics policy, and instituted an internal Web site to handle anonymous complaints regarding any aspect of the company’s operations.
About 25 complaints have been logged at the site, with the majority dealing with personnel matters involving managers. One serious allegation was investigated, and found that a particular action was legal and did not violate the firm’s policy.
“We’ve had best practices regarding how we operate since the company was founded, but we formalized a few things, and set up the internal Web site,” said CEO Jim Konrath.
“We wanted to make it easier for people to take that action if they feel it’s necessary,” he said.