Business Ethical Issues: 14 Emerging Trends in 2013

Our Ethics and Compliance Predictions and Recommendations

2/21/2013 1 NAVEX Global: The Ethics and Compliance Experts

Ethics & Compliance: 14 Emerging Trends in 2013

About Ed Petry, Ph.D.

Ed joined ELG in 2005 after almost ten years as Executive

Director of the Ethics and Compliance Officer Association

(ECOA). Ed served on the Advisory Panel to the U.S.

Sentencing Commission which was responsible for the

2004 revisions.

Earlier in his career he was a tenured Professor of Ethics

and a prolific author and researcher. He was also a

member of the Ethics Oversight Committee for the U.S.

Olympics.

At NAVEX Global, Ed applies his more than 25 years of

experience to help companies assess their ethics and

compliance programs. He has also written many of the

most admired codes of conduct for companies worldwide

and representing nearly every industry.

Forces Influencing Compliance

14 Emerging Trends in 2013

2/21/2013 NAVEX Global: The Ethics and Compliance Experts 3

Increased scrutiny: Governments worldwide have become more prescriptive in terms of ethics and compliance standards.

Stricter enforcement: Enforcement agencies have grown more sophisticated in assessing ‘real’ versus ‘paper’ ethics and compliance efforts.


Forces and trends influencing Compliance

Cross-pollination: Companies have fine-tuned the art of exchanging ideas and best practices.

Public expectations: stakeholders, investors, activist groups, consumers, business partners, and employees are demanding transparency and accountability.

High visibility: Social media, the 24 hour business press, and technology has made it impossible to hide


Forces and trends influencing Compliance

Emerging forces and trends

New employees and younger stakeholders have grown up in an era when

business ethics has been a regular topic in the news, in movies, as well as

in their college and even high school courses.

The constant drum beat of ethics scandals has engrained in the public a

deepening skepticism of corporations and especially the pronouncements

of their leaders.

Globalization has forced companies to think beyond their local culture,

legal frameworks and norms

Information technology has created new opportunities and new challenges.


Our selection based on analysis of forces and trends

Interviews with current and former ethics and compliance officers

Review of NAVEX Global databases


Our top 10 predictions and how to prepare

1. 3rd party risk: The Achilles Heel

Complex, multi-level supply chains and distribution networks that

span the globe.

The public – including investors but also employees and consumers - are

increasingly demanding transparency and corporate social responsibility

throughout the manufacturing and distribution process.

Companies face reputational harm from revelations of abuses and lapses in

the supply chain.

Expect more of the same and look for cases to include distribution

networks as well as suppliers.


3rd party risk: Our recommendations

Create a supplier code of conduct and update all relevant policies.

Clearly assign managers within your organization with the responsibility to ensure that third parties are aware of their responsibilities and your expectations,

Be specific in contracts regarding ethics and compliance requirements and ensure that your contracts allow you to periodically audit these third parties on a schedule of your choosing,

Hold third parties accountable if they do not meet their responsibilities,

Ensure that you are using a rigorous and defensible third party due diligence process and if necessary create a system to determine the risk level – legal and reputational – of your business partners, and

Offer to share your ethics and compliance best practices with your business partners.


2. Damage control: Scandals go viral

If you want to lose sleep, think how easy it would be for:

o A video depicting what appear to be poor working conditions in one of your

manufacturing plants to go viral.

o For employees to post a YouTube spoof about your customer service.

o For revelations to surface in chat rooms or cable news about a senior executive who

falsified his or her credentials.

Before you know what happened, your reputation – and your sales – are in

a free fall.

Few companies are prepared for such a fast moving crisis requiring a

coordinated response from various corporate functions.


Damage control: Our recommendations

Ensure that your internal reporting processes require prompt internal

escalation of allegations involving senior executives or which could cause

serious financial or reputational harm.

Conduct an annual crisis management drill. Ensure that the Board, senior

leadership, investor relations, public affairs, communications and ethics and

compliance are included. Use the drill to test preparedness and identify

gaps.

Make sure that your employees and business partners know what to do if

they come across on-line posts that could be damaging. Who do they need

to alert? Should they respond with posts of their own – (hint: the answer is

‘No’).


3. The Internationalization of Ethics and Compliance

The ethics and compliance world has shrunk.

Increasingly, we all play by the same rules.

One consequence of this is the internationalization of ethics scandals. Not

too long ago a list of top business ethics scandals would be dominated by

US-based companies. But in recent years, we’ve added to list:

o Siemans, NewsCorp, BAE Systems, Barings Bank, Standard Chartered, Olympus, Societe

Generale, Snamprogetti, Technip, JGC Corporation, Daimler AG, Alcatel-Lucent, Magyar

Telekom and Panalpina, to name just a few.


Think Global: Our recommendations

Watch your language. Review your code, policies and training for any U.S.-

centric language including idiomatic expressions and unnecessary

references to US-specific regulations.

Broaden your benchmarking.

Be sure to identify high risk employees and train them on topics such as

import and export controls, trade restrictions, technology transfers and of

course, bribery and corruption.


4. Election results mean more of the same

No one should expect the regulatory pressure to let up any time soon.

Enforcement seems to go in just one direction: more.

As has been the case in recent years, much of the ‘action’ will take place

within the bureaucracies as agencies

Every company, especially those that do business with governments, needs

to be sure that they are ‘in the loop’ and well positioned to ensure that

there are no surprises.


Focus on high-risk topics

Recent enforcement actions are a pretty good road map to risk areas that you need to address.

Review your code, policies and training to make sure that the right people are getting the right information, especially on these topics:

o Insider trading

o Antitrust/fair competition

o Business partner/supply chain integrity

o Employment issues (Safety, rights, wage and hour)

o Data privacy and security

o Government contracting and inappropriate government relations i.e. conflicts of interest

o Fraud, tax and accounting issues

o And of course, bribery and corruption.


5. Consequences of Morgan Stanley

Prosecutors have always had the option to exercise considerable discretion - and even decide not to prosecute an organization - if it had an effective ethics and compliance program in place.

The option was to go after the individual wrongdoer, while giving the organization a break – both as a way of encouraging other companies to also create effective programs but to also acknowledge that by having a program the company did all it was asked to do and the ‘bad apple’ simply acted contrary to the company’s directives.

In a 2012 Foreign Corrupt Practices (FCPA) case, the US DOJ declined to prosecute Morgan Stanley because of strong internal controls and cooperation with government investigators.

Similar efforts in Brazil, China, South Africa, Japan, EU

Question: To what extent will government agencies take into consideration the effectiveness of ethics and compliance programs when determining whether or not to charge an organization?


Making the case: Our recommendations

In the wake of Morgan Stanley, it certainly is worth the effort to:

Invest time and resources in ensuring documentation of all elements of

your ethics and compliance program.

Be sure to cast a wide net. Critical documentation on, for example, hiring

practices and discipline, may be housed in HR. Audit, Security, and Legal

also need to be included in the process.


6. Whistleblower cases in the headlines

As whistleblower rights and protections expand, we should expect even

more jaw-dropping whistleblower awards.

Cases and bounties, along with the provisions of the U.S. SEC

Whistleblower Program under Dodd-Frank, are bringing more and more

attention to whistleblowing.


Whistleblowing: Our recommendations

Demystify the reporting process.

Clearly communicate to employees what happens after a helpline report is

filed, how your organization actually handles non-compliance, and how the

information is tracked and followed up on.

Be more transparent. In most companies, there is good news to share with

employees.

Sharing more information and trend data can go a long way to overcoming

cynicism and building employee trust.


7. Retaliation takes an unexpected turn

The NAVEX Global 2012 survey on retaliation identified a shift in how

retaliation is defined.

While once viewed primarily as a management action against an employee,

such as firing or demotion, the definition of retaliation now increasingly

includes being shunned or being the target of negative comments or

behaviors from peers.

When you combine this broader understanding of retaliation with the

popularity of Facebook and similar sites, we expect to see incidents in the

coming year of retaliation via social media – the adult version of cyber-

bullying.


Retaliation via social media: Our recommendations

While companies have been playing catch-up to put in place social media

policies, add to your to-do list Code and policy language as well as training

that addresses the topic of social media used as an avenue for retaliation;

Communicate to and train managers on their role in maintaining an open

culture without fear of retaliation;

Create a system to track and investigate claims of retaliation; and

Consider creating a retaliation monitoring program for identified reporters

and participants in an investigation, which can allow you to watch carefully

for signs of retaliation over a period of time.


8. Even more focus on governance and accountability

2012 saw even more high-profile cases that illustrated the vulnerability of

companies at the top of the organization:

o Wal-Mart

o Yahoo

o Penn State

Recent years saw Boards and leaders are demanding much more than

perfunctory reports from ethics and compliance officers.


More than tone at the top: Our recommendations

Boards and senior leadership need concise, contextualized information as well as advice, training and assistance that are appropriate to their roles and responsibilities.

Target training for the Board of Directors and executive leadership on their specific roles and responsibilities and the unique risks their actions could bring to the organization.

Review Board reports - Boards don’t want to be immersed in details; instead they need clear information on trends, context and significant developments that could pose critical risks.

Once these risks have been identified, the Board and senior management need to understand the organization’s risk mitigation strategies and ensure that these strategies are implemented and effective.

Given the number of high profile cases involving Board members, it is important to assess how, and how well, the Board and senior leaders identify, surface and resolve their own ethics and compliance issues. Is there an appropriate resource? Are they comfortable using available formal and informal reporting and resolution processes?


9. Is this the year to (finally) engage with HR?

On a daily basis no corporate function touches more employees more often

than Human Resources.

Hiring, firing, discipline, performance reviews, and compensation – how

these key areas are handled shapes morale and corporate culture far more

than anything else.

Given their importance – which was singled out in the 2004 amendments

to the Sentencing Guidelines – it is astounding how we still find companies

that have not yet found a way to align HR and the goal setting process with

ethics and compliance.


A bridge to HR: Our recommendations

Update the information that is currently being shared with prospective hires as well as material including during orientation. These are important opportunities to be sure that the ethics and compliance message is on target.

Make sure an assessment process is in place for new employees and those being promoted that includes not only background screening but a review of their past support and alignment with your values and standards.

Determine whether performance measurements – especially for leadership – encourage their active participation in implementing ethics and compliance initiatives.

Utilize exit interviews as an additional method to gain insight into potential problem areas.

Take steps to include reports that are made to managers, HR, Audit and others in addition to your helpline reports - otherwise, you are only seeing a fraction of the whole.


10. Cracks in the Ivy Tower

Universities are large, complex institutions. Given the exposure to so many

ethics and compliance risks, it seems to be only a matter of time before

academic institutions begin to have their share of problems.

When the inevitable happens, the repercussions will be significant. Colleges

and universities are often the cornerstone of communities and they are

business partners and suppliers to industry on a number of levels.

Corporations have a vested interest in assisting academic institutions in

developing more effective ethics and compliance controls.


Back to school: Our recommendations

Though academic institutions have a wealth of expertise on ethics and

related matters, when it comes to managing an ethics and compliance

program they have much to learn from corporations.

Take the initiative to share your expertise with your alma maters or local

university.

Our professional associations can and should do more to encourage and

enable academics to participate in best practice forums and in meaningful

research.

Corporations should apply the same ethics and compliance due diligence to

their academic partners as they do other suppliers and third parties.


Too big to jail

IPOs and conflicts of interest

Employee mobility and the risk to confidential information

Taming Ethics and Compliance ‘Big Data’


Other topics on our ‘Watch List’ for 2013

The Last Word: Introspection

After twenty years of business ethics will the continuation of scandals generate a backlash or at least a serious rethinking of our approach and methods?

Is the public beginning to become disenchanted with our approach to business ethics? Are our employees becoming more cynical and are we turning a blind eye to our own hypocrisy?

Over the years surveys and focus groups have identified a gap between the public view of business ethics and what we, as ethics and compliance professionals, actually do.

What is the impact of this disconnect? How long can we maintain our credibility if we continue to focus on a narrow range of topics that is out of sync with public expectations?

Is this the year for us to step back and assess our approach and to broaden our understanding of the scope of our jobs?. Better to do some soul searching now than to be unprepared if (and when) the backlash occurs.


You will receive an email with an archived version of the presentation with 72 hours.

If you have further questions, please contact:

Ed Petry Vice President Ethical Leadership Group, [email protected]

Thank you for your Participation!

Business Ethical Issues: 14 Emerging Trends in 2013

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