3 Developing A Corporate Culture of Integrity

Business and Professional ETHICS
FOR DIRECTORS, EXECUTIVES AND ACCOUNTANTS

Eighth Edition, Len Brooks, Paul Dunn
Ethics & Governance

Developing a Corporate
Culture of Integrity
Session 4
© 2018 Cengage Learning. All rights reserved.

Developing an Ethical Corporate Culture
Focus of Session

Why Ethical Governance?
Objectives – to develop an understanding of:

• Ethical governance
• Why a culture of integrity is important
• How to develop & maintain a culture of integrity
• Key implications for accountants
• Key Business Ethics developments

Global Business Ethics Value Chain (1 of 2)

Global Business Ethics Value Chain (2 of 2)
DETERMINANTS OF VALUE…Success = f(Trust + Respect)
CORPORATE CULTURE
ETHICS PROGRAM &CODE
TOP MANAGEMENT SUPPORT
STAKEHOLDER SYNERGIES
CHARACTER
GLOBAL MEDIA
PERCEPTION OF:
TRUST
RESPECT
RELATIVE IMPACT
RELATIVE SALIENCE
LOCAL CULTURE

Board of Directors Accountability
How should the Board discharge its responsibility?

What are the red flags that should be watched for?

Curriculums are Changing
AACSB Ethics Curriculum Themes
Per AACSB Ethics Education Task Force Report, June
2004

Ethics & Compliance Program Improves
Behaviors & Perceptions

A Culture of Integrity can help remedy
deficiencies
• Corporate Culture – those shared beliefs, values, and
other means that guide the actions of a corporation’s
employees and agents.
• A Culture of Integrity depends upon the set of beliefs
and values that drive norms and actions.

Organizational Culture – the values, beliefs, norms, &
practices shared by an organization’s members

Organizational Culture, Individual/Team
Outcomes, & Organizational Effectiveness

A Culture of Integrity/Ethical Culture is
essential for:
• The enthusiastic support of some employees,
customers, and other stakeholders.
• Guidance about values or integrity expectations:
– When to adhere to the corporate code.
– How to make decisions that protect the company’s
reputation and further its strategic objectives.
• Sound risk management.
• Meeting governance expectations/requirements.
Good ethics, good reputation, good business, …
competitive advantage

Additional Evidence (1 of 3)
• The 2009 National Business Ethics Survey of the

Ethics Resource Center reports that a strong ethical
culture reduces:
– Pressure to compromise standards
– Observed misconduct
– Failure to report observed misconduct
– Experienced retaliation for reporting
Ethics Resource Center, 2009 National Business Ethics Survey,
http://www.ethics.org/resource/2009-national-business-ethics-survey.

• The KPMG International Survey of Corporate

Responsibility Reporting 2011 states:
– Corporate responsibility (CR) reporting [which
demonstrates sensitivity to the interests of stakeholders]
has become the de facto law for business.
– CR reporting enhances financial value.
– 95 % of the 250 largest companies in the world (G250)
companies) now report on their corporate responsibility
(CR) activities, with two-thirds of the reporters based in
the United States

– Almost 60 % of China’s largest companies already
report CR metrics.
KPMG Forensic, KPMG International Survey of Corporate
Responsibility Reporting 2011,
http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/
corporate-responsibility/Pages/2011-survey.aspx.

Ethical Leadership is Vital (1 of 2)
Essentially, an ethical leader must embody the organization’s vision and

values, and influence others to follow his or her lead. Functionally, an
ethical leader must:
• Ensure that the vision and values of the organization are ethically sound
• Identify with and support them
• Communicate them
• Ensure that the organization’s ethical culture (code, training, decision
making, performance indicators, reward systems, and monitoring
system) supports its vision and values
• Motivate other leaders and employees to adhere to them
• Monitor and reward or penalize performance

Ethical Leadership is Vital (2 of 2)
R. Edward Freeman and Lisa Stewart, Developing Ethical Leadership,
(Business Roundtable Institute for Corporate Ethics, 2006), 3, http://
www.corporate-ethics.org.
Key characteristics:
• integrity, trustworthiness, honesty, sincerity, and
forthrightness or candor
Linda Klebe Treviño, Laura Pincus Hartman, Michael Brown, “Moral Person
and Moral Manager: How Executives Develop A Reputation for Ethical
Leadership,” California Management Review 42:4 (2000): 128–142.

Bernie Madoff Scandal, 8e, p. 127 (1 of 2)
• What did Bernie do?

• Was Bernie’s sentence too long?
• SEC issues:
– Derelict staff punishment? Reforms adequate?
• Audit issues:
– Brother-in-law as auditor? Did no audit work?? Self-
regulation working?

Bernie Madoff Scandal, 8e, p. 127 (2 of 2)
• Whistleblower concerns:
– Need for moral courage?
– How can whistleblowers get people to listen and act?
– Was Markopolos always ethical?
– Most surprising aspects of M’s testimony? See
http://www.youtube.com/watch?v=uw_Tgu0txS0
• Investor’s responsibilities? Red flags? Give up their
gains?
• Should “buyer beware” prevail?
• Would a culture of integrity have helped?

Wells Fargo’s Unethical Culture, 8e, p. 265
See highlighted section in text pp. 265-267

Review subsequent media stories
1. What did the unethical culture result in?
2. What was the principal cause?
3. To whom was the outcome unfair?
4. How could the major problems be rectified?

Questionable Values at Goldman
Sachs 8e, p. 626
1. How could the culture described be changed?
2. Who will need to cause this culture to change?
3. What will have to happen to cause this change?
4. Is it likely that Goldman Sachs will be able to hire the
best and the brightest recruits?
5. How would Goldman Sachs ensure that corporate
psychopaths would not be hired?

Hospital Governance Challenges (1 of 2)
See Case Reading posted, missing from 8e, Ch. 5

Kelly has asked you to give her advice on the following matters:
1. What major governance problems does WGH face? Which
problems are the most important and need to be fixed as
soon as possible?
2. What are the most important ethical problems faced by a
general hospital? How could these ethical problems best
be managed?
3. Should WGH introduce a crisis management process? If
so, what should its objective be? How could that best be
achieved?

Hospital Governance Challenges (2 of 2)
4. Why should WGH introduce a protected whistleblower

program? Who should administer it, what factors would
make it successful, and how should it report?
5. Are there any other governance issues that Kelly should
consider?
6. Should Kelly accept the nomination as Vice-Chair?

Corporate Psychopaths vs Ethical Leaders (1 of 2)
The term corporate psychopaths has been created to capture the

essence of people who:
• “… lack a conscience, have few emotions, and display an inability
to have feelings, sympathy or empathy for other people."
• “… ruthlessly manipulate others, without, conscience, to further
their own aims and objectives.”
• “Although they may look smooth, charming, sophisticated, and
successful … should theoretically be almost wholly destructive to
the organization they work for.”
• “… are callously disregarding of the needs and wishes of others,
prepared to lie, bully and cheat and to disregard or cause harm to
the welfare of others.”

Corporate Psychopaths vs Ethical Leaders (2 of 2)
Corporate psychopaths are thought to gravitate to

industries, firms, etc.
References
Babiak, P. and R. D. Hare: 2006, Snakes in Suits When Psychopaths
Go to Work, 1st Edition (HarperCollins, New York).
“The Corporate Psychopaths Theory of the Global Financial Crisis”,
Clive R. Boddy, Journal of Business Ethics, Spring 2011, Vol. 102,
255-259, 256.
Perkel, S. E.: 2005, ‘Book Review: Bad Leadership: What It Is, How It
Happens, Why It Matters’, in B. Kellerman (ed.), Consulting to
Management 16, 59–61.

The Fraud Triangle

Maslow’s Hierarchy of Needs

Heath’s Seven Rationalizations of Unethical
Actions
• Denial of responsibility.
• Denial of injury.
• Denial of the victim.
• Condemnation of the condemners.
• Appeal to higher loyalties.
• Everyone else is doing it.
• Entitlement.
Source: “7 Neutralization/Rationalization Techniques”, a speech by
Joseph Heath at the Centre for Ethics at the University of Toronto,
April 9, 2007

New Governance Expectations
Greater after Enron, AA, WorldCom

• Need for Proactive Prevention of Problems – better
comprehensive risk management
• Accountability/Transparency to stakeholders
• Concern for Reputation Risk
• Need for strong ethical corporate culture
• Better understanding & management of corporate
culture
• Better decision making

New Board Responsibilities
• Comprehensive Risk Management

– Broad understanding of business model
– Financial literacy
– Guidance & Control framework
– Focus on corp. culture, ethics & reputation
– Business ethics…whistleblower protection plan
– Ethics Risk Management
• Trust, but challenge, don’t turn away
– Caremark National Case, trend

COSO Enterprise Risk Management Model
Doesn’t Address Potential Deficiencies
Deficiencies to Remedy:
• ID of Mindsets
• ID of Expectations
• ID of Ethics Risks
• MGT of Motivations
• Cultural Deficiencies
• Failsafe systems

Comprehensive Risk Management depends
upon the Corporate Ethical Culture
• Comprehensive Risk Management utilizes both:
A. Key risk factor identification & measurement
B. Review of key business processes including the ethical
culture that underpins process integrity
• Ethical culture provides guidance for employees about
when to adhere to the Code, when actions are not
covered in Code, in a grey area, or in a crisis - tools to
measure ethical culture do exist
Enron’s Board failed to consider any of this!
Few corporations do A, fewer do B!

Audit Committee’s Role is Key
• Understand key business operations

• Understand comprehensive risk management model
and reports
• Examine key/large transactions
• Ensure compliance with good policies
• Ensure fair presentation
Who wants this risk?
How much should the members be paid?
Nortel Networks Audit Committee Case

Design an Ethical Corporate Culture For the MMPA
Program
• What are the key values?
• How would you reinforce them?
• How would monitor them
• What rewards or penalties would you use?

How can good ethics and good governance be
instituted?
1. Create an Ethics Program
– Identify important values
– Build values into culture & decision making
– Train/Reinforce – leaders must reinforce
– Monitor Performance
– Reward/Punish
– Re-evaluate values & ethics program
2. Create an Ethical Corporate Culture

Creating & Implementing an Ethical Corporate
Culture

Establishing an Ethical Corporate Culture
– The Leadership Component

Executive Reputation & Ethical Leadership

Establishing an Ethical Corporate Culture –
The Core Values & Issues Component

Stakeholder Interests Ranking, Risk
Assessment & Usage

Ethics Program/Code Orientation Types
Orientation Primary Focus

Compliance-based Preventing, detecting, and punishing violations of the
law
Integrity or Values-based Defines organizational values and encourages
employee commitment
Satisfaction of external stakeholders Improvement of image with and relationships with
external stakeholders (customers, the community,
suppliers)
Protect top management from blame “CYA” or cover your ___
Combinations of the above Values and compliance-based, for example
Sources: Trevino, Weaver, Gibson and Toffler, Cal. Mgt. Rev., 1999, and Paine,
HBR, 1994, 111; Badaracco & Webb, 1995, 15.

Corporate Culture – Key Mechanisms
• Cultural
– Values, tone at the top, reinforcement...
• Structural
– Code, Ethics Officer, Program...
• Procedural
– Ethical decision making - ordinary + crisis mgt.
– Ethics inquiry...
– Internal Controls … 20/60/20 Rule
• Failsafe
– Whistle blower protection...to Board…Enron, GE
– Ethics/values audit
To create an awareness of how we do things around here.

Guidance - Codes of Conduct/Ethics
• Primary guidance document
• Choices:
– Imposed control vs. self-control
– Organizing focus
 Stakeholder interests, strategic policies, issues
 Title & depth of focus
o Credo, Code of Ethics/Conduct/Practice
• Useful sources:
– “An overview of implementing and developing codes of conduct”,
http://www.icaew.com/en/technical/ethics/practice businessethics/practice/developing-
and-implementing-organisational-codes-of-conduct;
– International Federation of Accountants, 2007, “Defining and Developing an Effective
Code of Conduct for Organizations”.
http://www.ifac.org/sites/default/files/publications/files/Defining-and-Developing-an-
Effective-Code-of-Conduct-for-Orgs_0.pdf .
Guidance, encouragement, commitment, monitoring

Whistleblowers are essential
GE Whistleblower story:
• Boss & bosses’ boss overcharging Israel for jet fighter
engines
• Gathered evidence for 4 years
• Sued for $70 million - False Claims Act
• US Government took case over
• Whistleblower can get up to 25% under FCA
• Settled for $59.5 + $9.5 mil.
• How much would you give W/B? Why?
Whistleblowers to SEC recently got a raise 10% to 30% - July
21, 2010.

Governance Measurements: Why Bother?
• If you can’t measure it, you can’t manage it
• Ethics/Corp. Social Performance (CSP) feedback
– Company objectives
– Personal objectives
– Reinforcement decisions
– Evaluation of management
• Compliance disclosures - environment, labor, ISO
• Stakeholder interest
• Creation of a competitive image
• Website: www.globalreporting.org for GRI initiative

Key Governance & Ethics Q’s
• What do Ethics & Governance mean?
• Why are ethics and governance important?
• To whom are corporations accountable?
• Are Governance & Ethics related? Give examples of
unethical acts & of poor governance.
• What are important governance mechanisms?
• Who is responsible for what?
• What role does corporate culture play?
• What caused the recent reform of ethics & governance
expectations?
• What are roles can an accountant’s play?

Implications for Accountants
What roles should/can accountants play with regard to

ethics & governance?
• .
• .
• .
• .

Appendices

Tool – Reputation Management A New
Stakeholder-Based Model

Tool - Corporate Citizenship Options
Chris Marsden, Business & Society Review, Spring 2000, Vol. 105:1, 9-25, Table p. 17.

Ethical Operating Values
PURE ETHICAL VALUES ETHICAL OPERATING VALUES

• Respect for rights of • Honesty, integrity, accuracy, recognition
individual stakeholders of stakeholder rights incl. environment
• Fairness between • Control of self-interest
stakeholders
• Maximize overall benefits • Profit is our goal , but not at any cost

Code Guidance Alternatives -Control/Motivation
Signaled

Patterns of Ethics Statements/Corporate
Codes
Organizing Focus Characteristics
Stakeholder/constituent Introduction + discussion by
stakeholder of principles, objectives
and policies
Strategic policy or responsibility Foreword by CEO, chair, president +
introduction, purpose, objectives,
policies, mgt. philosophies
Issues–oriented or corporate mission One issue after another
Description Depth of Coverage
Credo Inspirational short statement on key
values
Code of Ethics Deals with ethics principles (short)
Code of Conduct Deals with principles + additional
examples, etc.
Code of Practice Detailed rules of practice

Development and Maintenance of an
Ethical Corporate Culture
Step Purpose
Assign responsibility: Successful initiatives usually involve:
Chairman or CEO top level accountability and adequate budget
Ethics Officer champions, arbiters
Ethics Committee monitoring, feedback, advice and cheerleading
Ethics Audit To understand the organization’s ethical practices, and its
network of stakeholders and interests
Ethics Risk Assessment To identify important ethics problems that could arise
Top management support Assess – absolutely vital to success
Develop consensus on key ethical values Necessary to frame policies and procedures
Develop code of conduct, ethical decision-making Provide guidance for employees & all other stakeholders
criteria & protocols incl. sniff tests.
Develop ethics program: Leader's involvement To successfully present and provide supporting
Launch & subsequent training mechanisms for the guidance process
Reinforcement policies: Compliance Sign-off; Include in strategic objectives & managers objectives;
Measurements of performance; Communications Include in monitoring and reward structures
programs; Exemplar award system
Ethics inquiry service Information, investigation & whistleblower protection
Crisis management Establish a review mechanism To ensure that ethics are part of survival reactions

Director’s Responsibilities (1 of 3)
Functional Obligations
• Safeguard the interests of the company’s shareholders
• Review overall business strategy
• Select and compensating the company’s senior executives
• Evaluate the company’s outside auditor
• Oversee the company’s financial statements
• Monitor overall company performance
Report on The Role of The Board of Directors in the Collapse of Enron,
U.S. Senate Permanent Subcommittee on Investigations, July 8, 2002

Governance Structures & Issues

• Guidelines and governance disclosure rule
• Independence
• Board Committees:
– Audit Committee - Independence, Financial Literacy,
Authority, Mandate
– Nominating/Corporate Governance Committee
– Compensation Committee
Responsibilities of Directors in Canada, Torys LLP, 2009

Fiduciary Duties
• Loyalty
• Good faith/obedience
• Due care, diligence, and skill
Statement of Corporate Governance, The Business Roundtable (September 1997)
Conflicts
• Disclosure, actions to manage
Liability Issues
• Business Judgment Rule
• Oppression remedy
• Personal liability for Tort Claims
Responsibilities of Directors in Canada, Torys LLP, 2009

Business Ethics Developments
• Global ethical developments increase ethical

expectations
• Accountability to stakeholders
• Business ethics value chain
• Reputation matters
• Whistleblowers matter
• Culture of integrity required
• Many tools developed – see Appendix PPTs

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Business and Professional ETHICS

FOR DIRECTORS, EXECUTIVES AND ACCOUNTANTS

Ethics & Governance

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

Objectives – to develop an understanding of:

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

How should the Board discharge its responsibility?

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

• The 2009 National Business Ethics Survey of the

© 2018 Cengage Learning. All rights reserved.

• The KPMG International Survey of Corporate

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

Essentially, an ethical leader must embody the organization’s vision and

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

• What did Bernie do?

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

See highlighted section in text pp. 265-267

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

See Case Reading posted, missing from 8e, Ch. 5

© 2018 Cengage Learning. All rights reserved.

4. Why should WGH introduce a protected whistleblower

© 2018 Cengage Learning. All rights reserved.

The term corporate psychopaths has been created to capture the

© 2018 Cengage Learning. All rights reserved.

Corporate psychopaths are thought to gravitate to

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

Greater after Enron, AA, WorldCom

© 2018 Cengage Learning. All rights reserved.

• Comprehensive Risk Management

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

• Understand key business operations

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

© 2018 Cengage Learning. All rights reserved.

Orientation Primary Focus

© 2018 Cengage Learning. All rights reserved.