Ethics for sale: in today's regulatory climate, CEOs may have no choice but to buy

Chief Executive, The, Nov, 2004 by Joan Warner

Most chief executives say they are ethical people and that they run ethical organizations. But a vast new industry worth hundreds of millions of dollars is springing up to help companies be ethical--whether they need it or not. The captains of this new ethics industry include lawyers, auditors, psychologists, academics, Web masters, video makers and management consultants. Its product is ethics advice. Its fees are steep. And its targeted customer is the CEO.

The Sarbanes-Oxley Act of 2002, among other provisions, made CEOs and chief financial officers personally responsible for ensuring the accuracy of financial reporting. But balance sheets are only the beginning. The act also required the U.S. Sentencing Commission to review its 14-year-old guidelines on what constitutes an "effective compliance and ethics program." The tougher guidelines, which went into effect Nov. 1, charge CEOs with promoting "an organizational culture that encourages ethical conduct."

Circulating a boilerplate code of conduct won't cut it anymore. Nor will having an in-house lawyer vet key transactions, or making sure your IT department keeps all company emails for five years. And forget about bringing in an expert for an annual employee briefing.

Under the new rules, if a company is indicted, the CEO and the board must prove they directly oversee and monitor a comprehensive ethics program--or else incur stiffer fines and sentences. "The sentencing guidelines acknowledge that no program can prevent 100 percent of the problems," says Thomas R. McCormick, director for global ethics at Dow Chemical. "So it basically becomes a due diligence standard. You have to show that the company is doing everything it can do."

Already reeling from the financial and bureaucratic burdens of implementing new internal controls to comply with Sarbox, do CEOs need to invest even more time and money teaching their employees how to be good? If the mushrooming demand for ethics consultants is any guide, many feel they don't have a choice. Sherrie McAvoy, director of Deloitte & Touche's compliance and ethics services, says client calls to her practice have risen fourfold in the past two years. Business at PricewaterhouseCoopers' corporate governance, risk and compliance practice has doubled during the same period, bringing in some $100 million worth of assignments annually. At LRN, a Los Angeles firm that sells Web-based ethics training programs, half of the $150 million in revenues it has earned from online education since its founding in 1993 were booked in the past 18 months.

Such providers will perform everything from a quick evaluation of compliance procedures to a radical overhaul. "It depends on how deep the company wants to go," says Carlo di Florio, a director with the PricewaterhouseCoopers practice. "Some just review the code of conduct. Others want to be able to measure [ethics] performance."

But the common denominator among consultants these days, in response to the sentencing guideline amendments, is a focus on corporate culture--that is, ensuring that ethical guidance comes from top management and that the message is continually reinforced. "Enlightened CEOs aren't just running a separate compliance department. The whole company has to do compliance," says Dov Seidman, LRN's founder and chief executive.

Dow, DuPont Seek Outside Help

Dow, for instance, set up a wide-ranging internal ethics and compliance program in 1998 and has contracted with several outside vendors to make sure its good intentions actually bear fruit. The chemical giant turned to suppliers like LRN and Integrity International, a Waltham, Mass.-based provider of online compliance courses, for tools such as Web-based ethics training modules and an electronic annual survey on questionable payments. "The impetus came from our chairman and CEO, who wanted to elevate the whole idea of ethics and integrity," says Dow's McCormick. "The challenge is, Are our leadership messages being cascaded down through the organization and are people getting it?"

Some large companies are undergoing huge structural reorganizations to upgrade compliance at the highest management layer. DuPont is creating a new department to oversee governance functions that were formerly carried out by legal, human resources, finance and auditing staff. A new compliance committee reporting to the board of directors will consist of 10 full-time officers, representing its business platforms, geographical regions and core staff groups. "These positions will be high-potential people at the operating level who will be rotated out every two or three years," says Marjorie Doyle, a 24-year veteran of DuPont's legal department who will run the new compliance department. "They'll serve and then eventually be heads of our businesses. The point is to really get compliance into their DNA." Doyle suggests that DuPont's future CEOs are likely to be drawn from this committee's ranks. It's not clear whether the reorganization is related to DuPont's alleged cover-up of the health dangers associated with a West Virginia plant's manufacturing of Teflon.