Corporate Compliance & Ethics Programs

Leveraging Technology, Best Practices and Outcomes in Execution

LawNet, Inc. Conference - August 2004

Today’s Outline

What isn’t eLearning (and what is)Driving forces behind adoptionHow it worksExecution issues and 10 case studies

GOOD vs. BAD

Why compliance/ethics programs?

The 3 Driving Factors…

Improve behavior & work environmentReduce risk/avoid liability Align with Federal Sentencing Guidelines

Improving Behavior – Stats to Consider

46% observe one or more specific types of misconduct44% don’t report misconduct due to belief: – (1) no corrective action will be taken; – (2) information not be confidential

1 in 3 say employees show respect for fellow employees whose success is based on questionable ethics practicesNewer and younger employees 2x less likely to report misconduct… yet experience 2x greatest pressure to engage in misconduct

Source: National Business Ethics Survey, 2003, Ethics Resource Center

Where effective program in place, employees more likely to:Trust the actions of top management.Have a higher level of job satisfaction overall (lower turnover, more productive)Report misconduct; believe those who violate are held accountableFeel less pressure to commit misconductSafeguard company brand and reputationFocus on sustainable long term business performance contributions as opposed to looking for short-term gainWeather transition (mergers/acquisitions/layoffs) more easily

– National Business Ethics Survey, 2003, Ethics Resource Center

ROI Benefits of an Effective Program

Reduced Risk/Avoided Liability

Compliance is expensive ($$$)– Electronic discovery, disruption,

legal expenses

Litigation, settlements and claims are even more – PLI-Corpedia solutions recognized

by insurance industry for risk reduction

– Lower D&O, EPL, E&O rates

Consider a different LH outcome…

Some Numbers…

• $20b spent by regulatory agencies

• $850b spent by corporations to comply

• $850b reduction in market cap due to scandals

• $200b - $565b in white collar crime

• $$$b in litigation / penalties / fees

Federal Sentencing Guidelines

“An organization shall exercise due diligence to prevent and detect criminal conduct and…”

“Otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.

- US Sentencing Commission

“When determining whether to charge a corporation criminally for the acts of employees, “prosecutors should determine whether the corporation’s employees are adequately informed about the compliance program and are convinced of the corporation’s commitment to it.”

- Larry D. Thompson, Deputy Attorney General

New guidelines in effect as of Nov 1. 2004

Sentencing Guidelines Overview

Establish standards & proceduresAssign high-level authorityNot bestow authority to unethical executivesCommunicate & educateMonitor, audit & evaluateImplement anonymous reporting systemsApply consistent incentives & disciplineRespond, correct & modify

What do we have to do?

Types of Topics Covered

200+ Topics Include

•Sarbanes-Oxley Code of Conduct•Financial Integrity & Assurance•Ethical Decision•Intellectual Property•Information Security•Harassment•Record Keeping & Destruction•Health & Safety

•Anti-Money Laundering•Conflicts of Interest•Insider Trading•Gifts & Gratuities•Illegal Business Practices•Antitrust•OSHA•etc..

How does “an effective compliance program” appear to an organization?

99% WorkforcePenetration

Proof of Employee Comprehension

Proof of Employee Comprehension

How does “an effective compliance program” appear to employees?

Step 1: Open Registration Email Step 2: Access Training Menu

Step 3: View CEO Introduction Step 4: Take Course

Learning Methodology

Legal concept-basedReinforcing story-based scenarios

Customized to client organizationTesting for comprehension

Compliance and ethics situations varyTeach the underlying concept FIRST…

Use cases to reinforceResult: More effective decision making vs. imitative learning

Best Practices

Q: Can we define the practices of leading corporations?

A1: Process-based Practices: Open Compliance & Ethics Group (www.oceg.org)

A2: Principle-based Practices: The 5:8 Principles

OCEG Nonprofit Initiative (www.oceg.org)

Akin Gump, Strauss Hauer and Feld LLPAmerican Bar Association (ABA)American Corporate Counsel Association

(ACCA)American Institute of CPAs (AICPA)American Insurance Group (AIG)American Society of Corporate Secretaries

(ASCS)Arent Fox, LLPBlackboardBridge AssociatesBryan Cave, LLPCalPERSCorpedia EducationCorporate Integrity ServicesCenter for Applied Business EthicsDebevoise & PlimptonDechert LLPDeloitte & ToucheDeutche BankdoubleDrum Capital, LLCDuPont de Nemours

Ernst & YoungEthicsPointEthics Resource Center (ERC)Fleetwood RetailFrank B. Friedman and AssociatesFoley Hoag LLPGeneral DynamicsGeneral ElectricGeneral Electric Aircraft EnginesGilbert and AssociatesGovernmental Insurance ExchangeGoodwin Procter, LLPGrant ThorntonGroupo NuevoGulf InsuranceHarris, Wiltshire & Grannis, LLPHolland & Knight, LLPHoneywellHowrey, Simon LLPInstitute of Business EthicsInstitute of Internal Auditors (IIA)IntelISSIRRCKPMG

Kaye Scholer, LLP Kraft FoodsLatham & Watkins, LLP Lehman Bros.Littler Mendelson, LLPLouisiana Pacific Marsh, Inc. Mathews and Green, LLCMcKenna Long & Aldridge, LLPMichelin North AmericaMicrosoftNCS PearsonNew York City Pension FundsOrrick Herrington and Sutcliffe, LLPPractising Law Institute (PLI)Professional Liability Underwriting Society

(PLUS)PfizerProskauer Rose, LLPPricewaterhouseCoopersSkadden, Arp LLPSwidler Berlin, LLPWalgreenWinstead Sechrest & Minick, LLPZurich Financial Services

200+ individuals100+ organizationssince January 2003

Start with compliance and move to integrity– Effective programs are not built overnight

Model ethical behavior expectations– Living out the words

Test for impact and measure against peersFocus on the frontline – Younger & newer employees are most vulnerable

Systems awareness is not the same as credibility– 44% don’t report misconduct due to lack of system credibility

The 5 Principles

1. Titled officer with board-level exposure2. Make available & educate on multiple reporting channels3. Distribute & test entire workforce on “Code”4. Integrate to job and provide case study decision-support tools5. Communicate CEO’s message & personal ethics experience6. Survey for impact & benchmark a minimum of every 2 years7. Internally visible reward & discipline as reasonable/feasible8. Educate by core functional area within 30, 60, 120 DFH rule*

* Days From Hire: 30 for “Code”; 60 for sales, finance & purchasing; 120 for general management

The 8 Practices

“Nobody will follow you if they can’t trust you… And when they see a leader that doesn’t cut corners, they say, ‘Oh, that’s the way it’s done around here.’ ”

“My advice would be that I think the only thing in the world more important than your health is your reputation”

Case Studies – Firing the “Dumpster Diver”– The Jack Welch Handshake

Case Study (1):Lockheed Martin & Norm Augustine

Innovative Way to Instill Believability & “Tone from the Top”

Case Studies (2-6): Distributing & Testing on the Code

No Computers. – Uses kiosk system (Airline)– Paper-based w/tests entered by managers into HRIS (Medical)

No Regular Internet Access. – Run locally, upload when email is accessed (Pharma Reps)

No Email. – Tracks training by employee ID# (Retail Chain)

No Land.– CD-ROM based with satellite uplink (Oil Rigs)

“Will” creates “Way” – Innovative Internal and External Drivers

Company: Major Energy Producer

Surveying Segment: Conflicts of Interest Sample Quote: – “My brother works for MCI and they are our

company’s telecom provider. Is there a problem?”

Case Study (7): Testing/Surveying for Feedback on the Code

You want this type of dialogue to take place

Company: Heavy Equipment Manufacturer

Original Reporting System:– Developed In-House– Specific Individual to Call

Revised Reporting System– Augmented by Externally-Based Online & Offline Versions– Invested in education –provided relevant case study how it works

Case Study (8): Building Credibility to Report Channels

44% of employees who witness misconduct but don’t report it42% don’t believe corrective action will be taken

Case Study: High-Technology Company

Problem: Unauthorized Use of Resources; Violation of Company Policies

Action: Termination of 35 employees – announcement to the rest of the workforce

Case Study 9:Internally Visible Reward & Discipline

Difficult yet possible to reward behavior without being condescending...

but failing to publicize discipline may undermine system confidence

Company: Consumer Products

Former Training: Ad Hoc & In-Person

Revised Training: 30, 60, 120 DFH via eLearning

Impact: – No systemic problems discovered; 50%+ expense reduction– Institutionalized repeatable system– Focused on the frontline risks

Case Study 10: 30, 60, 120 DFH Rule

Newer and younger employees 2x less likely to report misconduct… yet experience 2x greatest pressure to engage in misconduct

Not everything is measurable… but good examples exist

Reduced Cost of Risk – Companies achieving 15-30% reduction in E&O, EPL and D&O

insurance Witnessed Misconduct Reduced by 75% Across Board

– When senior managers demonstrate “illustrative behavior”*, misconduct witnessed drops to 15% from 56%

Other Outcomes

* (1) Talk about importance; (2) Model behavior; (3) Inform employees; (4) Keep promises

Other Leading Practices Observed…

Planning Practices – CEO buy-in at outset– Temporary cross-functional teams with EVP-level “TieBreaker”

Design Practices– Invest in quality & customization - less expensive than you think– Instructional methodologies vary by type of workforce

Implementation Practices – Respect employees’ existing knowledge & time

Vendor Contracting – Demand disclosure of possible conflicts of interest – Get copies of the software code & records– Due diligence on financials & commitment to industry