When you play Monopoly with your son for the first time and he keeps rolling the dice until he gets the number he wants, your parental instinct kicks in and you remind him that no one wants to play with a cheater. When he responds by telling you that it is all right because you can cheat too, then you know you have to conduct a lesson about honesty.
Unlike a game of Monopoly, when your employees cheat, they are not using play money. Instead, they are playing with your corporate assets and reputation. Given the high stakes, you may just want to have that talk about honesty.
We all recall the lessons of Enron, where high-level decision-making was anything but ethical. In the competitive business world, corporations must heed the lessons of recent corporate debacles to ensure that meeting customer demands and beating out the competition does not come at the expense of ethical conduct. As the past has demonstrated, the failure to focus on ethics could, in the end, mean the failure of a once thriving business.
To ensure ethical decision-making, businesses need to do more than just mention it at the year-end corporate retreat. Instead, businesses must be proactive in policy making, employees must be educated and reminded of company expectations, a complaint procedure must be available to encourage the reporting of ethical concerns and corporate executives must lead by example.
Proactive And Practical Policymaking
Most corporations have a code of employee conduct setting forth expectations for employee performance and conduct. Preventing ethical misconduct, however, requires a code of conduct that is broader in scope and governs ethical issues such as conflicts of interest and confidential information, as well as requiring honesty and completeness in financial reporting.
Of course, publicly traded companies are quite familiar with and must disclose in their public filings whether they have adopted a financial code of ethics for their senior financial officers pursuant to Section 406 of the Sarbanes Oxley Act of 2002 (SOX). As defined by the SEC, this financial code of ethics must set forth standards designed to deter wrongdoing and to promote (1) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (2) full, fair, accurate, timely and understandable disclosure in reports and documents required to be filed by a company and in other public communications by the company; (3) compliance with applicable governmental laws, rules and regulations; (4) the prompt internal reporting to an appropriate person or persons identified in the financial code of ethics of violations of the code; and (5) accountability for adherence to the financial code of ethics.
For those employers not governed by SOX, many of these same ethical principles should be considered when implementing key policies governing employee conduct:
Conflicts of Interest Policy. Employees should be prohibited from engaging in conduct that actually or potentially creates a conflict of interest or the perception of a conflict. At a minimum, employees should be prohibited from having a financial interest in a competitor of your business.
It is also reasonable to expand this prohibition to prohibit employees who have the power to influence company transactions with vendors or suppliers from personally (or through a family member) having a financial interest in those vendors or suppliers. Essentially, you want to ensure that individuals who are negotiating contracts on your company's behalf are not influenced by any financial windfall obtained as a result of selecting a particular vendor. If your company also engages in government contracts, this policy should also reflect any limitations on employee political contributions or disclosure requirements.
Gifts. Accepting a fruit basket delivered to the accounting department during the holiday season is one thing, but an employee asking a potential vendor for tickets to a show is quite another. In light of the appearance of undue influence, employees should be prohibited from accepting gifts from a customer or potential customer, vendor or supplier unless they are of nominal value and the receipt of which is properly reported. Employees should also be prohibited from giving gifts, unless the gifts are specifically approved marketing items or gifts of a nominal value. Of additional concern should be the potential for undue influence over government officials or employees. Therefore, all gifts to such individuals should be absolutely prohibited.
Confidential Information. One of your organization's most valuable assets is its confidential information. The improper disclosure of this information could result in the loss of business or harm to your customers. To safeguard this information, your company should implement a policy prohibiting employees from using or disclosing confidential information during and after employment, unless in conjunction with the employee's job responsibilities. Employees should also be given practical guidance on when, if ever, it is permissible to discuss company business in a public area and how to safeguard company information, both electronic and hard copy, in the office.
Purchasing and Spending. Where employees are responsible for purchasing company equipment or other supplies, your company should establish reasonable limits on their spending authority as well as protocols for additional authorization of expenditures over certain monetary limits.
Financial Reporting. Employees responsible for both preparing the company's financial reports, as well as providing information to other employees who prepare the company's financial reports (such as sales employees reporting customer transactions or employees responsible for the company's bookkeeping) must be required to submit timely, accurate and honest information concerning those transactions, particularly with respect to the reporting of revenue.
Document Retention and Destruction. Most employers implement a document retention and destruction policy to establish reasonable limits (to the extent permitted by law) on the extensive amount of documents maintained on site. From an ethical standpoint, a few important issues should be incorporated into such a policy. Employees should be prohibited from destroying, concealing, falsifying, mutilating or altering any documents the company is required to provide to any government agency or court or any records used in federal, state or local investigations, actions or other proceedings. Employees must also be directed to suspend document destruction protocols in the event of actual or anticipated litigation, government proceeding or other adverse action against the company. SOX-governed companies must also comply with additional document retention and destruction guidelines.
Educate Employees On Ethical Principles And Conduct
Even the best policies on paper become ineffective when employees are unaware of their existence or don't retain a full appreciation of their relevance to their specific business responsibilities. Training is a vital part to facilitating ethical employee conduct.
The most effective way to train employees on ethical issues is to review the policies in person and to provide employees with real examples of potential unethical pitfalls.
If your business has concerns about employees accepting inappropriate gifts from contractors, provide employees with a clear example of the level of improper gifts and what you expect them to do if they receive them. If employees are responsible for receiving and reporting revenue from transactions, give them specific guidelines on how to properly record revenue and when to seek advice from other financial officers. If you want to avoid actual or the appearance of favoritism, explain the specific limits on working with relatives or approving a contract on behalf of the company where the employee or a member of his or her family has a financial stake.
Reviewing real examples of ethical dilemmas with employees gives much needed context to your company's expectations. Businesses should further support these efforts by requiring employees to sign an acknowledgment form indicating their receipt of these policies and agreement to comply with their terms. This acknowledgment will serve as evidence of an employee's awareness of such policies in the event disciplinary action is taken against an employee for an ethical violation.
Implement A Reporting/Complaint Procedure
SOX requires publicly traded companies to establish an explicit complaint procedure to enable employees to confidentially report to the company's audit committee any actual or suspected violations concerning any accounting, internal accounting controls or auditing matters.
Even if your organization is not a publicly traded company, establishing a complaint procedure to encourage employees to come forward with their concerns will bring greater compliance with ethics policies and foster an environment of honesty and accountability.
To be most effective, the complaint procedure should identify multiple individuals to whom complaints may be brought, provide for a prompt and fair investigation, explain that appropriate corrective action will be taken and identify that retaliation against anyone who makes a complaint or participates in the complaint process in good faith will not be tolerated.
Ethics Comes From The Top
If you want your employees to take your ethics policies seriously, executives must lead by example.
For example, if you implement a policy absolutely prohibiting the consumption of alcohol by employees at lunch, senior executives should not be seen ordering a round of drinks at an important business lunch meeting. If you know that a policy simply cannot be followed, consider instead carving out limited exceptions at the outset to take into account expected non-compliance.
Another way senior management can undercut employees' ethical conduct is to establish performance expectations that can only be met by bending the rules.
Of course it makes good business sense to have high expectations and demand the best from employees. However, where sales employees are directed to secure the sale by the end of the quarter "at all cost" or to give a customer whatever it wants in order to get the business, senior management should not be surprised when otherwise ethical sales employees submit excessive entertainment expenses, bestow lavish gifts to potential customers or, worse, unduly influence a customer.
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Ethical decision-making is about more than just doing the right thing. It is sound business practice and, quite often, required by law. Because ethical behavior does not always come naturally to your employees, and, at times, external forces may unduly influence otherwise well-intended employees, businesses should look to protect themselves and their employees by aggressively promoting a strong code of ethics, implementing a confidential reporting mechanism for complaints and implementing appropriate discipline for ethical violations.
Published March 1, 2007.
