Corporate Integrity

A Toolkit for Managing Beyond Compliance

Donna Kennedy-Glans, Robert Schulz

• Publisher: Wiley
• Year: 2010
• Print ISBN: 9780470835692
• eBook ISBN: 9780470739662
• Edition: 1
• Topic: Business
• Subtopic: Leadership
• Index: Business

How good companies build a culture of integrity

In the present environment of corporate governance brought on by high-profile executive scandals, this book makes a strong case for encouraging business leaders to manage beyond compliance. Achieving the bare minimum of compliance isn't enough. By making corporate responsibility and integrity a strategic priority-rather than something companies are forced to comply with-companies can realize tangible financial returns and benefits. This book provides practical advice, effective tools, and time-tested best practices for approaching corporate integrity strategically and managing an integrity program on a day-to-day basis.

There is a growing realization that compliance with the rules is only a minimum standard of performance, and an increasing demand from stakeholders at every level — shareholders, employees, customers along the entire supply chain, consumers, advocacy groups, and the local community at large — for more transparency and accountability from corporations.

But most businesses have little experience and few tools to deal with the urgent demand to increase corporate responsibility. Corporate Integrity provides practical tools and proven processes to manage complex integrity dilemmas and support implementation:

• Explains how to create a culture of integrity in your organization and how to motivate the appropriate corporate behaviors.
• Coverage includes: How to assess and measure integrity; how to align corporate integrity commitments and actions; how to design and implement dependable and strategic corporate accountability systems and processes; how to develop corporate integrity standards and report on them, and much more.
• Includes a wealth of practical business tools and best practices that readers can apply to improve the level of corporate integrity in their own company.
• Features three detailed case studies and numerous other examples that illustrate corporate integrity dilemmas and solutions in action.
• Shows how managing corporate responsibility strategically and proactively can go beyond a mere public relations exercise to foster a corporate "win" in the court of popular opinion and in the marketplace.
• Bridges the gaps between corporations, governments, employees, interest groups, and consumers.
• Offers tools and solutions that apply to both for-profit corporations and non-profit organizations.

PART 1

New Frontiers in Managing Corporate Integrity

CHAPTER 1

New Frontiers in Managing Corporate Integrity

What Does Integrity Mean?

Let’s start with an understanding of what integrity means. When speaking of integrity, some people think in terms of right and wrong, or black and white. Some people think of others as being either honest or dishonest. Some people think of corporations as either having business integrity or lacking business integrity. However, it is frequently difficult to say whether a corporate action or inaction is 100 percent right or 100 percent wrong. “Doing the right thing” often means different things to different people.

Almost every definition of integrity includes reference to characteristics of probity and honesty, but it is worth noting that while honesty and probity are embodied in integrity, integrity goes beyond honesty to incorporate a wholeness that defines corporate character. Integrity is defined with reference to the state of being whole, complete, or undivided.

Some situations are very clear. Specifically, it is illegal for corporations in most economies to pay money under the table to agents who bribe government officials in order to secure advantage in a contract award.

However, the consequences of illegal actions in different investment environments around the world are not always black and white. Instead, many situations have interwoven strands of complexity. Is a corporation acting with integrity if it invests in a host country where the government in power acts with prejudice against minorities within its population? How does this analysis change with the manner and degree of repression by the host government against such minority groups? It is not a simple task to assess whether corporate actions demonstrate integrity or not.

A single act by a single employee can be seen as a lack of integrity for a person or corporation. One inconsistent action of dishonesty or improbity can compromise a corporation’s reputation for integrity. Conversely, widespread and long-term consistency by all corporate employees is required to embed integrity.

Integrity is not a fixed end state. Legal and ethical “goal posts” are moved in response to stakeholder expectations. For example, shareholders have recently become suspicious of accounting manipulations and fortuitous cashing of options and bonuses, and have become more vocal in their skepticism. In response, the allocation of open-ended stock options to directors and managers is declining in favor of performance-based shares distributed only when an individual leaves the company.

Where Are We? How Did We Get Here? Where Are We Going?

Where are we? How did we get to this state of confusion, even anguish, about the integrity of companies? Why is public pressure for increased corporate responsiveness to business integrity values gaining momentum? And where are we headed?

Where Are We?

Within the last decade, business has sped well past the expectation that corporations are responsible only for making a profit for shareholders and to look after employees fairly. Business and society are now in a grayer zone, with few official judges or rules. It is little wonder that corporate stakeholders are confused about who is the “good guy” and who is the “bad guy.”

Unlike financial reporting systems, corporations have few defined processes or standards to measure, assess, verify, or report on business integrity. Verification of corporate alignment between integrity commitments and practices may be prescribed by law or required by corporate procedures, but these assessments are generally conducted after negative events. Control systems for managing business integrity are evolving— corporations are experimenting with balanced scorecards, triple bottom-line reporting that addresses financial and nonfinancial attributes, and even verification systems. Accountability processes are in an evolutionary state.

How Did We Get Here?

How did we arrive at this new frontier of business integrity expectations for companies?

• Economic liberalization and political reform in the world has seen exponential growth since the fall of the Berlin Wall in 1989. Social reform has been a natural corollary to these economic and political developments.

• Globalization has changed the way corporations communicate and has made corporate actions more transparent.

• As well, corporations have become the engine for development growth. In the late twentieth century, the private sector surpassed the public sector as the source of capital for economic growth in developing countries.

These evolutionary catalysts have produced expanded corporate influence and expanded corporate accountabilities.

Recent integrity breaches by high-profile and trusted corporate leaders have jolted society into the collective realization of these contextual changes. Now corporations are forced to ask key questions:

• What are the roles of government and multilateral organizations in regulating corporate integrity?

• To whom are corporations accountable?

• Who decides?

• Who measures?

• Who rewards or punishes corporate behavior?

Where Are We Going?

Corporate leaders face unprecedented pressure to respond to stakeholders. Stakeholders expect credible assurances from corporate management about business integrity and accountability. Corporations’ stock price and market capitalization depend on their credibility in delivery of these assurances. For example, the share price for Royal Dutch/Shell Group fell sharply in January 2004 in response to the company’s admission of a 20 percent overstatement of proven reserves. Assuming moderate oil prices of U.S. $25 a barrel, this overstatement of oil reserves alone represents more than U.S. $67.5 billion in potential future revenues. As the company articulated plans to accurately redefine reserves and replaced top managers, Shell’s stock price gradually recovered, but not in full alignment with the industry sector.

Sometimes corporate credibility is compromised due to external forces. In the face of the tampered Tylenol bottles, Johnson & Johnson withdrew all Tylenol bottles from pharmaceutical shelves at a cost in excess of U.S. $100 million. In order to restore public confidence, Johnson & Johnson championed the conversion to tamper-proof containers.

Managing to Compliance

Corporate managers are all too familiar with the accounting, governance, and ethical failures of leading companies. The fallout from Enron and WorldCom, and then Parmalat, has triggered public demands for both increased regulation of corporations and assurances of corporate compliance with these regulations.

Corporations are forced to commit substantial resources to keep abreast of emerging and evolving governance requirements, and to ensure compliance. Implementation of the detailed compliance and process verifications prescribed by the Sarbanes-Oxley Act has doubled audit fees and time commitments for executives and directors in many U.S.-based corporations and their supply chains.

With this increased focus on compliance, corporate management may develop a false sense of security and inadvertently neglect key issues such as business development, corporate strategy, competitive advantage, and organizational culture. Corporate managers trapped in the treadmill of compliance can easily lose sight of the objectives of the rules that they are complying with on a day-to-day basis.

In the face of pressure to comply, managers will focus on observing third-party rules on a reactive basis rather than proactively managing business integrity. When the rules and regulations governing corporate behaviors originate from multiple governmental and nongovernmental sources, corporations struggle to ensure that they meet all the regulations. Opportunities for strategic assessment and proactive management of integrity outcomes can be compromised because corporations are overly focused on strict compliance with rules and regulations.

Managing Business Integrity Beyond Compliance

Compliance with laws and regulations is a necessary corporate motivator, but complete compliance with rules by all employees of a company will not guarantee business integrity. A business culture of integrity is needed to address the complexity of modern corporate issues. A culture of corporate integrity will naturally foster individual employee compliance.

Some corporate leaders recognize that compliance is a minimum standard of corporate performance that may fail to respond to their key stakeholders’ legitimate expectations. For example, an automotive manufacturing plant may proactively and voluntarily adopt global health, safety, and environmental standards that extend beyond compliance with less onerous local regulations. Although the manufacturer is not legally required to adopt global standards, the company can voluntarily and proactively respond to the expectations of their employees, suppliers, and consumers.

Proactively anticipating stakeholder expectations is often less expensive in the long run when compared to short-term compliance with regulations. Retrofitting manufacturing plants to comply with emergent environmental and occupational health and safety standards is generally more expensive than incorporating these standards in the initial plant design. Corporate leaders do not need to spend more money to manage business integrity. But corporate leaders do need to be wise in their budget allocations to ensure that corporate behaviors manifest integrity.

Compliance with regulations requires efficient and effective administration by corporate personnel. Insightful corporate leadership requires management beyond compliance—a thoughtful understanding of the complexity of the decision-making processes and behaviors necessary to establish integrity within an organization.

What Motivates Compliance and Beyond Compliance Management?

Why do corporate managers choose to administer to compliance, or to manage beyond compliance? What is the business case for business integrity strategies based on compliance, or that go beyond compliance? These are critical questions.

First, let’s look at what motivates compliance management. Why would corporate leaders choose to manage to compliance? Corporate managers who choose to manage to compliance are generally motivated by top-down leadership models, fear of legal liability and penalties, corporate reputation management strategies, rigid adherence to corporate codes of conduct, dependence on financial risk strategies, and a general sense that compliance with regulations is “the right thing to do.”

Corporate managers who do not even manage to compliance are generally motivated by greed or ignorance. Greed can be encouraged or ignorance perpetuated if corporate values are not clarified or reinforced in corporate conduct codes or internal communications. Greed may also be condoned if the corporate culture reinforces or rewards integrity breaches and the consequences of noncompliance (for example, fines and penalties, financial and reputation impacts) are either not deterrents or are not well understood. Analysts’ expectations for short-term share performance can also implicitly encourage noncompliance behaviors for the sake of reporting quarterly profit.

Some corporations avoid making voluntary business integrity commitments beyond legal compliance because a voluntary commitment to business integrity may create greater accountabilities for the corporation. This could mean that managers may be accountable if they fail to meet the beyond compliance standards that they set for themselves. We witnessed similar reactions two decades ago when business was encouraged to adopt voluntary environmental practices as part of responsible care programs.

Fears of legal liability associated with integrity commitments beyond compliance were perpetuated by allegations launched against Nike Inc. in the United States based on its public relations statements on integrity. In response to claims that it had mistreated workers in Vietnamese manufacturing plants producing its athletic gear, Nike countered with a...

Table of contents

• Praise
• Title Page
• Copyright Page
• Dedication
• Preface
• Acknowledgements
• Introduction
• PART 1 - New Frontiers in Managing Corporate Integrity
• PART 2 - Process for Managing Corporate Integrity and Scenario Applications
• PART 3 - The Road Ahead for Corporate Integrity
• APPENDIX - APPENDIX: Business Tools
• Index