Doug Cornelius on compliance for private equity real estate
Ethisphere has published its collection of 2009 World’s Most Ethical Companies. Twenty companies dropped off the 2008 list and 25 new ones were added, leaving a list of 99 companies.
Who caught my eye was Jones Lang LaSalle, a real estate company (one of my company’s business relationships) who was back on the list again. They seem to be the benchmark for the real estate industry.
(The Ethisphere website has been up and down all day. Try back later if the links are not working)
EthicsPoint sponsored and presented a webinar from Bob Phillips of RW & Associates, Inc. on Developing a Culture of Honesty and Integrity…its Not Easy! These are my notes.
Bob started with a quote from Stephen Covey: “The leader of the future, of the next millennium, will be one who creates a culture or value system centered upon principles.”
Bob moved on to “organizational culture” and focused first on culture. “Culture is the social and political environment in which people get their work done.” He considers the elements of the culture as
A starting point is whether you and your leaders openly model and support honest and open interpersonal interactions that is designed to build trust. He finds the receptionist is a great barometer of an organization. Can they pass the test of what the organization is like? Another barometer is to build trust by giving employees the information they need to do their jobs.
Inconsistent leadership creates an environment of fear and the “foxhole” mentality.
On the other side, open cultures have a direct connection between organizational vision, values, and behavior. The leader should be able to translate the values hanging on the wall or the code of conduct on their bookshelf into action. Show your employees that you are committed to them and they will be committed to you.
He attached monetary gain to have a great place to work. If you invested in the Fortune’s Best 100 Places to Work, you would have a better return than the broader stock market. From 1998 to 2006, the average annual return achieved by the S & P 500 was 5.97%, while the Russell 3000 achieved an average of 6.34% per year. By comparison, if you had bought shares in the 1998 ‘100 Best’ and simply held on to them until end 2006, you would have achieved average annual growth of 10.65%. If you had reset your portfolio each year on publication of that year’s ‘100 Best’ list, you would have achieved 14.16% annual growth. There is a dollar value to building a great place to work.
Leaders need to show consistent behavior to build trust, show a passion for the values, demonstrate ethics, and model the honest and open behavior. That also means accountability and consequences for meeting or failing to meet the values.
The keys to success start with an open and listening leadership. The culture needs to accept multiple points of view, but be committed to one course of action. You need to engage your workforce to let them know that they are being heard.
There is also a need to reconcile personal beliefs with your organization’s belief structure. You may get an employee who works in less ethical culture. There are multiple elements to a platform of integrity. Employees need to understand how they are expected to perform their work. They need to know that the organization’s principles are in place to ensure the organization meets their business and financial goals.
Honesty starts with individuals, but it is leadership and the organization that provide the environment to make it work. But in the end, it is the individuals within the organization that must be accountable. An organization cannot have a culture of honesty and integrity if leadership does not create an environment that accepts and models open and honest communication.
See also:
EthicsPoint sponsored this webinar and these are my notes. Howard Sklar, Vice President & Global Anti-Corruption Leader, American Express Company was the presenter. Howard was quick to point out that it is not just the “tone” but having the right “tone.” Also, it not be just the tone “at” the top, but that it be the tone “from” the top.
Howard started off with trying to define “tone at the top.” Many people just default to the Justice Potter Stewart’s take on pornography: “We know it when we see it.” Howard likes the ACFE definition:
An organization’s leadership creates the tone at the top – an ethical (or unethical) atmosphere in the workplace. Management’s tone has a trickle-down effect on employees. If top managers uphold ethics and integrity so will employees. But if upper management appears unconcerned with ethics and focuses solely on the bottom line, employees will be more prone to commit fraud and feel that ethical conduct isn’t a priority. In short, employees will follow the examples of their bosses.
Howard offered up his working definition for the presentation:
Tone at the top is a visible willingness by senior management to let values drive decisions to prioritize those values above other factors – including financial results and to expect all others in the organization to do the same.
Howard pointed out that the first recommendation of the Treadway Commission was the importance of setting the tone at the top.
But who is the top? The Audit Committee, CEO, Board of Directors, vice presidents, . . .? They are clearly at the top of the organization. But in this context you need to be thinking about all leaders throughout the organization. Front-line employees are most influenced by their immediate manager.
Repetition is important. Leaders and employees throughout the organization need to hear the message and hear it consistently. It is important for leaders to talk about the values of the company and to live up to those values. You can not have a message of “win at any cost” and you can no longer operate as a company with the value of “win at any cost.”
Howard says there is no such thing as “compliance training.” It is all business training. You sell the product in the right way. You need one message. It is also important to integrate personal stories into explaining the values of the company.
Compensation is an incredibly important part of the message. If your salary or bonus is not affected by compliance. [For an example of misaligned pay structure look at Countrywide in originating sub-prime mortgage loans: Did Compliance Programs Fail During the Financial Industry Meltdown?]
The example of an opposite message is a company ingraining earnings targets in employee. Employees should not be told that earning targets are the most important part of the company. Short term thinking is short term thinking, and values are long term.
Compliance can set the goals, but they are part of the business goals not a separate set of compliance goals.
An important measurement for compliance is whether an employee feels comfortable reporting misconduct.
Howard recommends that a compliance officer become a stop in the exit interview process. Departing interviews can offer some insights and discuss problems that they may have been unwilling to report when they were an employee.
Howard says you should make sure that compliance and the compliance officers are on the company’s organization chart.
Some of Howard’s other best practices:
See:
There is a mismatch between the law and corporate ethics. According to Boston College Law School’s Kent Greenfield it can only be addressed by changing the law itself, and aligning it better with ethics. In his paper Corporate Ethics in a Devilish System, Journal of Business & Technology Law 3: issue 2 (2008): 427-435, Greenfield talks about companies behaving unethically but within the bounds of the law.
“In essence, a corporation should consider the cost of illegality as the penalty, fine or other costs discounted by the chance of the exposure of the corporation’s illegality. The law, in other words, merely imposes a price for illegal behavior. If the corporation is willing to pay, then no problem with illegality.”
The mismatch comes from the confusion that complying with the law is the same as behaving ethically. Ethics means more than obeying the law.
Greenfield argues that the limited liability of corporate law is “inconsistent with the ethical norm of taking responsibility for one’s own actions since it shields people from liability that arises from their wrongful conduct.” I don’t agree. Actions of a corporation happens through the individuals in the corporation. Corporate law has evolved over the last few years, holding executives personally responsible for illegal actions. The limited liability of a corporation shields investors from losing more than their invested capital. It does not shield the actors within the corporation.
Greenfield proposes changing rules of governance where companies would be required to give stakeholders who don’t own stock – like for example employees and communities – to make their views part of the firm’s governance.
“Bringing the views of non-shareholder stakeholders into the governance of the firm would not only make it more likely that the corporation will consider broadly the impacts of its decisions, it also will – because shareholders tend to have a very short time horizon – necessarily cause the firm to take a longer term view of its decisions and strategies. Such inclusion will also cause corporations to internalize more the costs of their decisions.”
I agree that the movements in price of a public companies stock can influence corporate decision-making. Many people have argued about setting the proper incentives for management to look to the long term and not pay attention to the short-term gyration of stock prices.
But Greenfield ignores private corporations. One of the arguments for private equity is that ownership and management can look to the long-term goals of the firm rather than focusing on short-term stock price gyrations. Everyone is focused on creating the long term value of the company.
Thanks to Leon Gettler of SOX First for pointing out the article: Corporate Ethics and Law.
Published February 1, 2009
In addition to its list of the 100 Most Influential People in Business Ethics for 2008, Ethisphere also published a list of the Top Ten Individual We Won’t Miss from 2008.
Ethisphere has published its list of the 100 Most Influential People in Business Ethics for 2008.
The winners are broken down into the following nine core categories:
Here is the list:
| 1. Liu Qi 2. Neelie Kroes 3. Heinrich Kieber 4. Kim Yong-chul 5. Mark F. Mendelsohn 6. Lee Scott 7. Shan Ramburuth 8. Bobby Jindal 9. Myron Steele 10. Philip Collins 11. David Steiner 12. Angel Gurría 13. Ronald Luri 14. Barack Obama 15. Christoph Frei 16. Jeff Immelt 17. Nguyen Van Hai & Nguyen Viet Chen 18. David L. Stub 19. David Parker 20. Thomas Friedman 21. Davor Harasic 22. Anne M. Mulcahy 23. Dawn Primarolo 24. Ben W. Heineman, Jr. 25. Nicolas Sarkozy |
26. Dong Zhengqing 27. Leslie Gaines-Ross 28. R. Alexander Acosta 29. Cui Fan 30. Masamitsu Sakurai 31. Paul Krugman 32. Alexandra Wrage 33. Michael Hershman 34. Jed Rakoff 35. Dr. Anwar Nasution 36. Michael Johnston 37. Jim Senegal 38. Mike Barry 39. Marc Gunther 40. Neville Isdell 41. Eric Schmidt 42. Danny Wegman 43. Larry Thompson 44. H. Dean Steinke 45. James Jurwa 46. Sven Holmes 47. Lucas Benitez 48. Anonymous Chinese apartment owner 49. Earl E. Devaney 50. Nancy Boswell |
51. Haruka Nishimatsu 52. Henry Waxman 53. Sudhanshu Pokhriyal 54. Virginia D. Klein 55. James A. Mitchell 56. Tim Costello 57. Jim Koch 58. Jim Tyree 59. Ken Livingstone 60. Kathleen M Hamann 61. Victor Marrero 62. Ben Popken 63. Howard Schultz 64. Klaus Töpfer 65. Harry Halloran 66. Le Hien Duc 67. Peter Kinder 68. Bernard Listiza 69. Joseph Keefe 70. Magnus Berglund 71. Manny A. Alas 72. Max Bazerman 73. Bob Langert 74. Patrick Fitzgerald 75. Thomas Boone Pickens |
76. Dave Welch 77. Edward J. Zore 78. R. Edward Freeman 79. Mr. Frédéric Wehrlé 80. Greg Valerio 81. Chris MacDonald 82. James Goodnight 83. Brenda C. Barnes 84. Simon Ho 85. Gavin Newsom 86. Nobutaka Machimura 87. Anders Dalhvig 88. Odell Guyton 89. David Crawford 90. Patricia Werhane 91. Paul Newman 92. Barbara Krumsiek 93. Amy Domini 94. Richard McClellan 95. Rob Cameron 96. Harry Woolf 97. Tensie Whelan 98. Jack Grynberg 99. Alexander Solzhenitsyn 100. Kim Hun-sung and Park Jin-shik |
You can listen to a webinar from the Georgetown Journal of Legal Ethics Fall Symposium – Corporate Compliance: The Role of Company Counsel from October, 2007.
Introductory Remarks
Panel I – Conflicting Duties: Lessons from the KPMG Prosecution
Panel II – Gatekeepers Inside Out Webinar
Panel III – Corporate In-House Counsel in the Age of Internal Compliance
Kirk O. Hanson, executive director of the Markkula Center for Applied Ethics, asked at a recent meeting of the Business and Organizational Ethics Partnership: “What are the signs that a company is getting it right and addressing the most important dimensions of managing ethics in an organization?”
Anne Federwisch put together a summary of the presentation, Toward an Ethical Culture: Characteristics of an Ethical Organization, and a copy of the powerpoint slides.
His best practice elements:
I am not writing about the financial bail-out. I am focusing on a real estate construction story that happened back in 1978 when Citicorp Center was built On Lexington Avenue in New York City.
A portion of the building was constructed on air rights to accommodate a building on one corner of the property. The design put the load-bearing columns in the center of each side instead of the corners. The structural engineer, William J. LeMessurier, designed a wind brace system arranged is a tiered V pattern on each side of the building to enhance the lateral stability.
The building code of New York City required testing of building’s resistance to perpendicular winds. But since the the support columns were at the mid-point of each facade, the building stability was at greater risk from diagonal winds. This problem was discovered after construction of the building.
This put more stress on the building than LeMessurier had anticipated. The problem became critical when the braces had been changed from the more-expensive welded joint to a bolted joint.
LeMessurier calculated that the building would only be able to handle a 16 year storm. Basically, the Citicorp Center building could collapse in a moderate hurricane. It was July and hurrican season was approaching.
LeMessurier deatiled the mistakes in a document called “Project SERENE.” The acronym stood for “Special Engineering Review of Events Nobody Envisioned.” LeMessurier convinced the building owner to weld on reinforcing braces. The repair was conducted under a cover story to prevent panic. panic that would surely come from the thought of a 59 story building collapsing in a heavy wind.
Among the courses of action he briefly considered was driving along the Maine Turnpike at a hundred miles an hour and steering into a bridge abutment without telling anyone else about the problem he had discovered. Another was silence. Few people knew about the problem.
By blowing the whistle on himself, he risked professional disgrace, litigation, and bankruptcy.
“It wasn’t a case of ‘We caught you, you skunk. It started with a guy who stood up and said, ‘I got a problem, I made the problem, let’s fix the problem.’ If you’re gonna kill a guy like LeMessurier, why should anybody ever talk?”
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