Thursday, May 25, 2017

Ethical-Regulatory Compliance

Recent ethical, regulatory, and legal responses to enterprise wrong-doing is driving a sea change throughout organizations in the United States. There are many new regulatory guidelines in place, evidencing the imperative to drive ethical behavior and establish integrity across both public and private organizations.

The largest organizations are creating new executive roles such as Chief Compliance Officer or Chief Ethics Officer that report directly to corporate Boards and ensure corporate-wide compliance across a wide range of ethical-regulatory mandates. Smaller organizations are bringing in ethical-regulatory consultants to help achieve compliance within mandatory regulatory timeframes and to establish executive and management training programs that keep personnel up to speed with new laws and behavioral standards.

These evolving corporate governance matters deal with issues that are common to all organizations in all industries, such as transparency, accountability, and integrity. Sarbanes-Oxley and the new rules issued by the New York Stock Exchange and NASDAQ require the immediate attention of all public companies from the biggest to the smallest. Compliance with these new initiatives requires demonstrable change within organizations from top to bottom, including ethical-regulatory training, monitoring, and reporting across a broad spectrum of ethical-regulatory matters.

The number of ethical-regulatory issues that must be addressed within modern organizations has become increasingly complex and non-intuitive. It was once the case that employers could expect employees to know intuitively what was right or wrong based upon their individual ethical sensibilities. However, executives, managers, and employees can no longer be assumed to be abreast of all the various issues, nor do they necessarily know how to respond to them without timely training and education.

It is for this reason, for example, that the stock exchanges are requiring all listed companies to establish Codes of Conduct, policies, and ongoing training programs that provide the guidance necessary to act ethically and legally in our complex world. More sophisticated education is required for board members, officers, and higher-level executives. These individuals must have a current understanding of conflict of interest, anti-trust, insider trading, confidentiality, unfair competition, price fixing, discrimination, harassment, cronyism, environmental responsibility, international business regulations, and social responsibility issues to keep both themselves as individuals and their organizations free of risk.

Violations of laws and regulations can lead to expensive and punitive regulatory or legal sanctions, loss of employment, the payment of restitution, and jail time. The U. S. Sentencing Guidelines dictate severe fines and imprisonment in most cases. Here are a few recent examples:

1. WorldCom, Inc., responsible for possibly the biggest corporate accounting scam ever instigated, is a case in point. Top executives cooked the books to hide $11 billion in expenses and inflated profit and revenues over a period of years. Bernard Ebbers and Scott Sullivan were ousted and now face securities fraud charges. To date the company has been fined $500 million in cash and $250 million in stock.

2. John J. Rigas, the founder of Adelphia Communications Corp., was indicted on fraud charges, civil charges, and securities fraud. The government is seeking forfeiture of $2.5 billion in illegally gained proceeds. Adelphia investors lost $3.5 billion.

3. Arthur Andersen LLP, famous for destroying evidence in the Enron probe, has been fined $60.5 million and still faces innumerable lawsuits from creditors and shareholders.

4. Samuel Waksal, co-founded and CEO of ImClone Systems Inc., has been sentenced to 87 months in prison, $4 million in fines and back taxes, and was banned for life from leading a public company, all for securities fraud.

Ms. Martha Stewart has been indicted on obstructing justice, making false statements to federal officials, and conspiracy for her role in selling her ImClone shares. While asserting her innocence, she could face up to 5 years in prison and $1 million in fines for her purported $50,000 gain.

5. Under new corporate crime laws and theories of unjust enrichment, ill-gotten gains are being recovered from unethical ex-CEOs and executives who were forced out for alleged fraud or poor performance. The NYSE itself, now under new leadership, is after $120 million of Mr. Dick Grasso unconscionable compensation.

6. Microsoft Corp. is presently facing the prospect of fines ranging up to $3.2 million, or 10% of their global revenue, in an antitrust case over their Media Player software.

7. At HealthSouth Corp., Richard M. Scrushy, the former Chairman, and other key executives are presently facing possible jail time and fines over massive accounting fraud.

8. In a recent international price fixing episode, Odfjell Seachem of Norway was fined $42.5 million and their Chairman was fined $250,000 and sentenced to four months in jail.

9. A former executive vice president of Grey Worldwide was recently sentenced to 70 months in prison and fined $247,000 for taking kickbacks, rigging bids, and overbilling clients.

10. Quick & Reilly was fined $175,000 by the NYSE for failing to exercise reasonable supervision in business activities while conducting accounting activities and failing to report customer complaints.One need only consult the “Legal Briefs” in the Wall Street Journal to see a constant stream of white collar fines and imprisonments each week. In most cases, heading off one episode of individual or corporate wrongdoing would pay many times over for the expense involved in teaching employees upstanding behavior and building corporate character.

Among the deeply serious consequences of such lapses are the damaged and devastated reputations of both individuals and their organizations. These ethical-regulatory changes make it imperative for organizations to staff or retain consultants to take meaningful steps toward establishing an ethical culture that builds organizational character sooner rather than later.

Building America’s integrity won’t be accomplished overnight. Even then, there will still be those who succumb to the temptation of illicit gain and greed. But, surely we can already see the truth of the proverbial sayings that “honesty is the best policy” and that “good ethics equals good business.”

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