How Boards Can Reduce Corporate

Misbehavior
Introduction
● "Welcome to our presentation on 'How Boards Can Reduce Corporate Misbehavior.' In recent years, corporate
leaders have faced increasing scrutiny and personal accountability for unethical behavior within their
organizations."
● "Today, we explore the imperative for corporate boards to shift from reactive approaches to proactive
strategies that prioritize ethical integrity and corporate responsibility."
● "Drawing from extensive experience across industries and a deep understanding of compliance failures, we
introduce a comprehensive ten-step program aimed at reducing the risks of illegal behavior, reinforcing ethical
conduct, and enhancing the reputation of companies as responsible corporate citizens."

Presentation Overview:

● Provide a brief outline of what the audience can expect during the presentation:
● "Throughout this presentation, we'll delve into each of the ten crucial steps."
● "We'll discuss how these steps collectively form a proactive approach to winning with integrity."
The Role of Corporate Boards
● Role of Corporate Boards:
● Corporate boards act as guardians of the firm's capital, reputation, and ethical standards.
● They set the tone for ethical behavior and compliance within the organization.
● Importance of High Standards:
● Corporate boards need to set high ethical and compliance standards.
● Proactive measures are essential to prevent legal consequences and reputational damage.
● Recent Examples:
● Mention recent examples of corporate misbehavior and legal actions to emphasize the consequences of
failing in this role.
10-Step Program Overview
● Objective: Presenting a comprehensive 10-step program designed to help boards reduce the risk of illegal behavior
and strengthen ethical conduct within the organization.
● Program Overview:
● Highlight that this program is based on decades of experience and extensive research in various industries.
● Emphasize that it's intended to enhance the company's reputation as a responsible corporate citizen.
● Step 1 to Step 10:
● Briefly list each step from 1 to 10.
● For brevity, provide the titles of each step and one or two words summarizing their focus.
● Importance:
● Explain that these steps collectively create a proactive approach to winning with integrity.
● Stress that they replace reactive methods and promote ethical behavior as a core value.
Step 1 - Create an Ethics Committee
● Purpose of an Ethics Committee:
● To establish a culture of integrity and ethical conduct within the organization.
● To develop robust controls and processes for promoting ethical behavior and compliance.
● Responsibilities of the Committee:
● Oversight of the firm's culture of integrity.
● Creating and revising the company's code of conduct.
● Appointment of the Chief Ethics and Compliance Officer (CECO).
● Committee Composition:
● Nonexecutive directors should make up the committee.
● Committee members should receive feedback from other directors.
● Focus Areas:
● Ensuring ethical values are integral to the company's business strategy.
● Measuring an ethical culture and addressing suspicious behavior.
● Training:
● Committee members should be specially trained in measuring an ethical culture.
● They should have the moral courage to take responsibility for mistakes and call out suspicious behavior.
Step 2 - Appoint a Chief Ethics and Compliance Officer
(CECO)
● Role of the CECO:
● The Chief Ethics and Compliance Officer (CECO) is responsible for the day-to-day operational oversight of the
company's global ethics and compliance program.
● Their role includes ensuring adherence to applicable laws, ethical principles, and the prevention of unethical behavior.
● Qualifications of the CECO:
● The CECO should possess knowledge of relevant laws, ethical theories, and an understanding of unethical behavior.
● Active listening skills and good judgment are essential attributes.
● Reporting Structure:
● The CECO should report to the board's ethics and compliance committee.
● They should have the ability to report on the program's effectiveness without fear of retaliation.
● Oversight and Evaluation:
● The board's committee responsible for ethics and compliance should meet with the CECO quarterly.
● They should oversee the evaluation of the CECO's performance, set compensation, and other employment terms.
● Cross-Functional Team:
● The CECO should chair a multi-disciplinary team of managers that regularly reviews the company's policies and
procedures.
● They should have authority over local compliance officers and access to information on disciplinary actions.
Step 3 - Establish and Post Ethical Standards
● Purpose: Clear ethical and compliance standards are essential for promoting integrity and ethical conduct.
● Mission Statements and Codes of Conduct:
● Well-crafted mission statements and codes of conduct educate directors, officers, and employees about core
values, standards, and procedures.
● Codes should be simple, relatable, and continuously reiterated.
● Examples:
● Good models include GE's "The Spirit and the Letter" and Johnson & Johnson's "Our Credo."
● Continuous Reinforcement:
● Consistent reiteration of codes makes them an integral part of the company culture.
● Ignoring codes, as seen in the case of Enron, can lead to ethical failures.
Step 4 - Promote Quality and Safety
● Purpose: Ensuring product quality and workplace safety begins with leadership and clear escalation policies.
● Leadership's Role: Leadership's response to issues on the production floor defines quality and safety standards.
● Escalation Policies: Clear guidance on handling issues at the local plant level versus escalating them within the
organization is crucial.
● Example: Gillette's Grooming Division required immediate escalation to the CEO for any manufacturing problems with
the potential to cause harm.
Step 5 - Develop Integrity Performance Indicators
Purpose: Integrity performance indicators are essential for monitoring and promoting ethical behavior within the
organization.

Examples of Integrity Performance Indicators:

● Customer and Employee Complaints
● Help Line Feedback
● Workplace Safety
● Absence and Sick Days
● Expense Report Accuracy
● Property and Asset Misuse
● Honesty and Truthfulness

Aligning Behavior and Incentives:

● Job descriptions should include ethical expectations.

● Compensation and promotions should consider ethical performance.
● Avoid misaligned incentives that encourage unethical behavior.
Step 6 - Use Due Care in Hiring Executives
● Hiring Ethical C-Suite Executives:
● The board must ensure that officers appointed to run the business are honorable and of high moral character.
● Four key character traits correlated with successful business leaders are integrity, responsibility, forgiveness,
and compassion.
● Importance of Background Checks:
● Past behavior is the best predictor of future behavior.
● Background checks, criminal history checks, and reference checks are critical.
● Role of Executive Search Firms:
● Executive search firms can provide candid assessments from their networks.
● They aid in identifying candidates who align with the company's ethical values.
Step 7 - Mandate Interactive Training
● Importance of Training:
● Training is essential to communicate ethical and compliance standards to all employees and board members.
● It ensures everyone understands the company's values and the laws applicable to the business.
● Training Topics:
● Firm values and their importance.
● How the firm generates revenue.
● Discussion of relevant laws and regulations.
● Insights into the science behind unethical behavior.
● Effective Training Methods:
● Varied training methods, including video, gaming, face-to-face, and online tools.
● Use of adult learning specialists and subject matter experts.
● Repetition and Practice:
● Continual reinforcement of the message through creative means.
● Practical exercises to enhance judgment and decision-making skills.
Step 8 - Protect Whistleblowers
● Importance of Whistleblower Protection:
● Whistleblowers play a crucial role in identifying and addressing ethical and compliance concerns.
● Fear of retaliation is a significant barrier to reporting misconduct.
● Reporting Mechanisms:
● The company should have well-publicized reporting systems, allowing employees to report concerns
anonymously or confidentially.
● Open-ended ethics questions on surveys and exit questionnaires help monitor the workplace environment.
● Non-Retaliation Policies:
● A strong non-retaliation policy encourages employees to speak up without fear of consequences.
● Consider recognizing and honoring employees who report issues with awards or recognition.
● Global Considerations:
● Global companies should provide reporting mechanisms in local languages.
● Encourage employees at all levels to speak up, considering cultural differences.
Step 9 - Apply Rules Evenly
● Consistent Application of Rules:
● When misconduct is detected, the board must ensure that the company applies rules consistently, regardless
of the offender's rank, sales record, or performance.
● Enhancing Organizational Justice:
● Treating offenders equally enhances organizational justice, fostering a perception of fairness within the
organization.
● Research indicates that organizational justice has a significant impact on maintaining ethical behavior.
● Responsibility of the CECO and General Counsel:
● The Chief Ethics and Compliance Officer (CECO) and General Counsel should have primary responsibility for
ensuring that rules are enforced consistently.
● Real-World Example:
● Share an example where a company's failure to sanction a high-performing employee led to legal
consequences, emphasizing the importance of equal enforcement.
Step 10 - Be Prepared for Compliance Failures
● Preparing for Compliance Failures:
● Compliance failures and ethical lapses can occur, even in well-managed organizations.
● Being prepared to respond effectively is crucial.
● Predictable Surprises:
● Compliance failures often fall under the category of "predictable surprises."
● This means that with proper planning, many failures can be foreseen and managed.
● Contingency Plans:
● Companies should have contingency plans in place.
● These plans should outline when to involve internal and external stakeholders, such as PR and social media experts,
and government relations personnel.
● Modifications to Programs:
● After detecting an offense, the board must take reasonable steps to stop the misconduct.
● This may include making necessary modifications to the compliance and ethics program.
● Example - Mary Barra (GM):
● Share an example like Mary Barra's response after GM agreed to pay penalties for ignition switch issues.
● Emphasize the importance of changing behavior and addressing issues promptly.
Conclusion
In conclusion, fostering ethical excellence in corporate governance through a proactive ten-step program is essential for
organizations to mitigate the risks of corporate misbehavior, uphold their reputation, and prioritize integrity. Embracing this
approach empowers boards to take a proactive stance in promoting ethical conduct, ensuring compliance, and ultimately
becoming exemplary corporate citizens in today's business landscape. By implementing these strategies, companies can
not only prevent ethical lapses but also foster a culture of trust, responsibility, and accountability.
Thank you