Ten Things You Can Do to Avoid Being the Next Enron

May 29, 2009
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Ten things your company can do to avoid being the next Enron:

1. Examine your ethical climate and put safeguards in place.

Corporations are composed of cultures. Take a good close look at your culture. What are the norms of behavior? What is valued? Are employees rewarded for succeeding at any cost or are they urged to be shepherds of the corporation's reputation as well as its assets? What pressures do they face to commit misconduct? What systemic problems exist that could encourage good people to make bad decisions?

Consider conducting a formal assessment of your corporate culture from the perspective of attitudes, perceptions, values, standards of conduct, pressures to commit misconduct, communications, risks and vulnerabilities. Pay particular attention to your corporate values and how well they have been internalized by your Board, senior leadership, employees at all levels and key stakeholders.

2. Don't just print, post and pray.

If you have a Code of Conduct or an Ethics Code, printing copies, posting them on the wall and on bulletin boards is not enough. Codes of conduct are an outgrowth of company missions, visions, strategies and values. Thoughtful and effective corporate codes provide guidance for making ethical business decisions that balance conflicting interests.

Codes of conduct need to be actual living documents encouraged and valued at the highest levels. Board members and senior executives have to set an example for the type conduct they expect from others. Ethical lapses at the upper echelons of management tend to be perceived as tacit permission to choose the "path of least resistance" at lower levels. Senior management needs to hold itself to the highest standards of conduct before it can demand similar integrity from those at lower levels.

Executives who refuse to tolerate misconduct among their peers and who actively seek to model high standards of honesty, transparency and trustworthiness can best demonstrate the commitment to ethical conduct.

Publicly restate your corporate Code of Ethics as soon as possible and agree to publish the Code every year in your corporation's annual report.

3. Build a robust ethics infrastructure that is self-sustaining.

Writing a code of conduct, supporting it at top levels and communicating it to employees is just a start.

Corporations should have a committee of independent non-executive directors on its Board of Directors who are responsibility for ensuring that systems are in place in the corporation to assure employee compliance with the Code of Ethics.

Measures they recommend should include staff training, evaluations of compliance systems, appropriate funding and staffing of the corporate ethics office, and effective protections to employees who "blow the whistle" on perceived actions contrary to the spirit and/or letter of the Code.

Many corporations establish independent "hot lines" or "help lines" where employees can seek guidance when they are faced with an ethical dilemma or when they encounter unethical conduct in the workplace. Annual training on the code is becoming commonplace. Every publicly listed corporation should consider establishing a regular review system to ensure the Code is dynamic and updated in the light of new developments.

4. Publicly commit to being an ethical organization.

Go public. No, not an IPO (Initial Public Offering) an EPO: an Ethical Public Offering. Corporations that are open about their ethical standards and conduct seem to be more trustworthy than those who stay silent. Some issue an annual report of their ethics accomplishments and the challenges they faced. Other corporations openly post their vision, values and codes of conduct on their web sites for public viewing.

Every member of the Board of Directors of a publicly listed corporation should be required to sign the Code of Ethics and pledge that she or he will never support a Board motion to suspend the Code.

All outside law firms and auditing firms that consult to publicly listed corporations should be required to sign statements noting that they understand and accept the corporation's Code of Ethics.

5. Separate auditing from consulting functions.

Allowing Arthur Andersen to both audit and consult with Enron created at least an appearance of a conflict of interest. Subsequently, hiring Arthur Andersen employees as Enron employees who then managed the affairs of their former colleagues made this a real ethical conflict of interest. The independence and integrity of financial auditing organizations are fundamental to the stability and growth of American business and free markets throughout the world. Auditing and consulting functions must be kept separate.

6. Talk with employees at all levels often!

Failure to communicate causes far more pain than smashing your thumb with a hammer. The sore thumb will heal poor communication can be fatal.

In the 1980s, Tom Peters talked extensively about Managing by Walking Around (MBWA). In the purest sense, MBWA is a way for supervisors and managers to best communicate their (task and ethical) expectations and requirements in daily, informal meetings with employees. These informal conversations give employees two sets of data. There is the spoken information that is exchanged and the inferred data that employees glean from the more subtle communications that accompany a manager's words.

Employees basically want to know two things. They want to know what is expected or required for them to survive and to be successful (tasks and ethics). They also want to know "how they are doing" at this point in time (tasks and ethics).

Communicate the following: Goals, Roles, Expectations and Priorities.

  • Goals
    When "wandering around" make certain that you remind people of the short term and long term goals of the job. They should see how their goals support the organization's mission and vision. This is also an excellent opportunity to ties goals to the code of conduct or code of ethics. Let employees know that how you accomplish a goal is just as important as accomplishing the goal itself. Cutting corners can hurt the corporation, its reputation and, eventually, the individual employee.
  • Roles
    Let employees know how their piece of the job fits into the bigger picture. Remind them of their importance and value. Ensure that they understand their role as it relates to yours. Ensure that they understand what kind of conduct you expect.
  • Expectations
    Be certain that employees understand exactly what you expect. What has to be done? When? To what standards? How will it be evaluated? What should they do if they encounter any roadblocks or unanticipated changes? How do you want them to handle questions and/or "gray areas" where expectations may be unclear or conflicting?
  • Priorities
    Remind your employees of the organization's operational priorities. If safety, quality and customer service come first for example, then make that clear to your employees. Be clear about what you expect them to do when they experience conflicts between any of these core values. Clarify what constitutes ethical conduct.

Don't just assume your employees know where you stand. ERC Fellows Program research indicates that unless leaders clearly and consistently communicate their values, employees will assume they are neutral on the subject.

7. Build ethical conduct into corporate systems.

Define your position as an ethical business. Provide employees and customers with a written pledge. These are our values. This is how we define what is right, fair and good. We promise that all employees (at every level) of this organization will treat each other and customers accordingly.

Train your employees on their ethical responsibilities. Teach people how to translate the pledge into specific actions that support the pledge and build trust.

Provide support and guidance to employees. Take time to share what you have learned about how the pledge applies in particular cases within the organization.

Measure your success. Implement simple systems to measure the effectiveness of this ethics initiative. Determine if employees are living the pledge and measure the differences it makes to your employees, your customers and your bottom line.

Reward those employees who choose to live the promises and remove those who don't.

8. Establish an Ethics Committee to constantly keep the organization focused on the seven main provisions of the Federal Sentencing Guidelines of 1991 in mind.

The Federal Sentencing Guidelines that became effective on November 1, 1991 require that "(2) Specific individuals within high level personnel of the organization have been assigned overall responsibility to oversee compliance with (the organization's) standards and procedures." We believe that oversight process involves seven main functions to be addressed by an organization's ethics committee:

  • Function One
    Review the definitions of standards and procedures. Starting with your organization's areas of operation, what are the activities that require a formal set of ethical standards and procedures? Begin by reviewing those which apply to each department. Are existing internal guidelines complete? Are they clear and useful to those who must carry them out?

    Have potential conflicts between individual regulations been resolved and their resolutions stated clearly? Make use of the information gleaned from employee reporting and clarification processes (i.e., your ethics "Hot Line" as well as employee surveys) to assist in this review process.

    Once the review is complete and any shortcomings have come to light your ethics committee should assign the creation of revised guidelines to the appropriate personnel. Included in that task is the design of a formal method for communicating standards and procedures to employees. This method should ensure that employees both understand and accept the ethics program.

    Meanwhile, the ethics committee can suggest behaviors to upper management that reinforce the organization's guidelines. Do not underestimate how management's conduct can affect the successful implementation of an ethics program.

  • Function Two
    Assume responsibility for overall compliance. The ethics committee should assert that it is the responsible authority for ethics compliance within its area of jurisdiction (corporate-wide or division-wide for example). It should serve as the court of last resort concerning interpretations of the organization's standards and procedures. When and if inconsistencies come to light in this manner, the committee should make recommendations on improving the existing compliance mechanisms. And, as always, there should be follow-up to ensure that compliance recommendations have been understood and accepted.
  • Function Three
    Assure due care in assigning discretionary responsibility. The ethics committee should define how the organization will balance the rights of individual applicants and employees against the organization's need to avoid risks that come from placing known violators in positions of discretionary responsibility. This includes the oversight of background investigations on employees/applicants who are being considered for such positions.
  • Function Four
    Communicate the organization's standards and procedures. As in our first point above, the ethics committee should define methods and mechanisms for communicating ethical standards and procedures. This includes the distribution of documents (codes of conduct, for example) to ensure that every employee understands and accepts the organization's ethical guidelines. To make certain that published standards are understood, the ethics committee should provide regular training sessions as well.

    Since communication is two-way, the ethics committee should solicit stakeholder input regarding how standards and procedures are defined and enforced. In this connection, it is useful to create ways of providing proof that each employee has received the appropriate documents and understands the standards and procedures described.

    We also suggest an ethics "hot line" to protect employees' privacy and ensure their access to a "safe" mechanism for seeking guidance and reporting suspected wrongdoing.

  • Function Five
    Monitor and audit compliance. Because compliance is an ongoing necessity, the ethics committee should design controls which monitor, audit and demonstrate employees' adherence to published standards and procedures. There should also be mechanisms which check the effectiveness and reliability of such internal controls.

    To warrant that the organization's goals, objectives and plans do not conflict with its ethical standards and procedures, the ethics committee should develop methods for regular review and assessment. Check also to ensure that formalized measurements and rewards do not motivate non-compliance.

  • Function Six
    Serve as primary agent for enforcement and discipline. Disciplinary provisions should be in place to ensure consistent responses to similar violations of standards and procedures (versus applying different standards to different employees based on their position, performance, function, and the like). There should be provisions for those who ignore as well as those who violate standards and procedures.
  • Function Seven
    Take the steps necessary to ensure that offenses are not repeated. When violations do occur, the ethics committee should have ways to identify why they occurred. It is also important that lessons learned from prior violations are systematically applied to reduce the chance that similar violations can take place in future

Stay abreast of changes. The Federal Sentencing Guidelines are currently under review and may soon change.

9. Choose to live your corporate values.

No compliance manual, regardless of its thoroughness, can cover every contingency. And, if one could be written that did cover all possibilities, it would occupy so much space and be so cumbersome to use that its covers would never be opened.

By equipping employees with corporate-supported values and empowering them to make decisions based on those values, you will free them to take action even when specific guidance isn't readily available. You will also enjoy the peace of mind that comes from knowing your employees have common ground from which all decisions can be made. There are also creative ways to get ethical issues communicated up the corporate ladder.

10. Keep the lines of communications open.

If you ask about what is going right, what is going wrong and what makes employees uncomfortable in their jobs, you can usually identify pitfalls before you step into them. Communicate openly and honestly.

Summary

To help avoid the fate of Enron and other companies whose ethics are called into question:

  1. Examine your ethical climate and put safeguards in place
  2. Don't just print, post and pray
  3. Build a robust ethics infrastructure that is self-sustaining
  4. Publicly commit to being an ethical organization
  5. Separate auditing from consulting functions
  6. Talk with employees at all levels often!
  7. Build ethical conduct into corporate systems
  8. Establish an Ethics Committee to constantly keep the seven main provisions of the Federal Sentencing Guidelines of 1991 in mind
  9. Choose to live your corporate values
  10. Keep the lines of communications open

Dr. Stuart Gilman, Dr. Patricia Harned, Frank Navran and Jerry Brown contributed to this article.