Ethics Compliance Program and Whistle-blowing Provisions

I have previously blogged about the corporate ethics and the increase in regulations and new laws imposed on businesses in recent years including the Sarbanes-Oxley Act and Dodd-Frank Financial Reform Act. In an ideal world we would not need such stifling regulations and corporate America would be free to pursue their own self-interests while improving the income levels and job opportunities for our citizens. Undoubtedly, the capitalist ethic works in the vast majority of cases. As in so many situations in life, however, it is the few fraudsters who can spoil it for the vast majority who attempt to play by the rules of the game and try to do the right thing.

In this blog I examine what makes for an ethical corporate culture. It starts with the “tone at the top”. Top management (i.e., CEO, CFO) must set an ethical tone that makes it clear to those in the organization that the rules must be followed, regulations adhered to, and identified best practices should have an ethical component. It’s not enough for top management to set an ethical tone, they must be supported by a diligent board of directors and audit committee that oversees corporate operations and financial reporting to ensure everyone plays by the rules and ethical standards are being followed.

Congress passed legislation known as the Federal Sentencing Guidelines in 1984 that sets rules for uniform sentencing policies for individuals and organizations convicted of felonies and serious (Class A) misdemeanors. According to the guidelines, an ethics and compliance program can help to mitigate the penalties imposed under the Law. Here are some key elements that can help to create the kind of ethical culture to protect a company from the actions of a “rogue” employee.

• Willingness to seek ethics advice
• Receipt of positive feedback for ethical conduct
• Employee preparedness to handle instances of misconduct
• Management can be questioned without fear
• Incentives, support, and encouragement to follow ethical standards
• Questionable means of conduct are not rewarded
• The organization encourages ethical conduct
• Employees believe organization is ethical

As pointed out in a study by the Ethics Resource Center, a strong ethical culture develops when the following elements are present.  

• Ethical Leadership: “tone at the top” of an organization and belief that leaders can be trusted to do the right thing
• Supervisor Reinforcement: individuals directly above the employee in the company hierarchy set a good example and encourage ethical behavior
• Peer Commitment to Ethics: ethical actions of peers support employees who “do the right thing”
• Embedded ethical values: values promoted through informal communication channels are complementary and consistent with a company’s official values

Today, it is not unusual to find a top-level management official with the title of Ethics Compliance Officer who oversees compliance and enforcement of the code of ethics. Many believe that an ethics hot line and encouraging a whistle-blower protection program is an essential part of building an ethical culture. In fact, both the Sarbanes-Oxley Act and Dodd-Frank include protections for whistle-blowers and Dodd-Frank even includes what has been called a whistle-blower’s “bounty” provision.

I have mixed feelings about paying whistle-blowers to come forth with information about their company that might lead to a monetary reward. At a minimum, whistle-blowers should take their concerns up the chain of command and try to resolve their concerns internally. With respect to external whistle-blowing, there is a confidentiality obligation that employees have to employers, and non-disclosure agreements may exist that tie the hands of employees who contemplate contacting external parties.

Nevertheless, I believe the test should be whether more good than harm would come from blowing the whistle on corporate wrongdoing. After all, investors may be harmed by fraudulent financial statements; the public may be harmed by environmentally unsafe practices; and the company may be following discriminatory practices. Utilitarianism (weighing harms versus benefits) is an accepted approach to corporate decision-making as long as the rights of stakeholders are not violated in the process of calculating the effects of proposed actions.

Above all else, whistle-blowers must be motivated by righting a wrong and doing the ethically appropriate thing, and not by greed, revenge, or other selfish motive.

Blog posted by Steven Mintz, aka Ethics Sage, on January 13, 2012