Editor: The National Legal Center Conference on "Ensuring The Competitiveness Of American Business: Restoring the Proper Regulatory And Enforcement Balance" a panel moderated by Stuart M. Gerson highlighted the fact that companies have adopted compliance programs that may help reduce their vulnerability to criticism and mitigate at least some of the adverse consequences portrayed in the hypothetical on page 3. How important are compliance programs in the defense industry and what is Raytheon's role?
Stephens: The defense industry's early commitment to compliance grew out of the Defense Industry Initiative (DII) which was formed in the wake of the Ill Wind cases - long before Sarbanes-Oxley focused attention on compliance. The DII now has about 65 members.
Our CEO has been chair of the DII steering committee for the last two years. The industry uses the DII as a common ground for developing codes of conduct and compliance standards. Although significant compliance issues still arise in the defense industry - as you know from reading the papers, DII has high visibility among the players in that industry, including the government. Because it produces a lot of interaction between the government regulators and the industry, it has become a structured and formalized way of having a dialogue and developing a common understanding where you want to drive voluntary compliance. In this way, we have spread across the industry a culture that is not just compliant but one that is actually good for business.
At Raytheon, we have sought to develop a culture where people are not afraid to raise their hand about issues. In the past people were sometimes afraid to raise their hand because they feared retribution - as a consequence, a host of problems, including compliance issues, went unsolved.
Editor: What are your views on transparency and self-disclosure?
Stephens: I would say the defense industry is pretty heavily regulated with an almost interactive kind of relationship with customers. This environment puts a web of relationships and regulations around how the company acts - so that in many ways internal compliance is an extension of the regulatory compliance community. We have developed a compliance oriented culture that is more transparent because we have a special relationship with our customer - the customer and the regulatory community look to us for credibility based on trust built over time.
Editor: In the old days, the CEO pretty much controlled what went to the board. Do the up-the-ladder reporting requirements of Sarbanes-Oxley create tension between the general counsel and the CEO?
Stephens: I think Sarbanes is important in that it made clear that corporate counsel is responsible ultimately to the board. You now have a safe channel where the board expects you to come to the audit committee or the public affairs committee and present them with what you have. This has the potential to create some tension within the organization. While our CEO is supportive of this process, in other companies the CEO might still ask why the general counsel is disclosing certain information to the board which the CEO feels is none of their business. But, the general counsel now has his or her responsibilities clearly spelled out in the law.
Editor: What are the reporting relationships of the chief compliance officer in your organizations?
Stephens: We have a chief ethics officer who is sort of a progenitor of all the ethics, values and cultural pieces, but also is responsible for most investigations triggered by ethics hotline inquiries. We also have a chief compliance officer, who looks at the more straightforward legal compliance issues. Both offices may generate some investigations. They both report directly to me. I have a direct reporting relationship on both of these fronts to our CEO and to our board of directors. Our ethics program is reviewed annually by the Public Affairs Committee of the board. Our Audit Committee gets a log each quarter from me through our ethics office that identifies all those matters that might involve some kind of internal controls, fraud or financial misconduct that relates to the operation of the company. We present those to the Audit Committee, which may then authorize such further action as it deems appropriate, including initiating its own investigation using independent counsel.
Published August 1, 2005.