Building corporate cultures: financial controls are fine, but don't forget ethics

Chief Executive, The, March, 2005 by Alan B. Graf, Jr.

A recent survey by Junior Achievement/Deloitte & Touche USA found that nearly one-third of teens believe you have to bend the rules to succeed. One has to wonder how that response was influenced by the infamous wave of corporate breakdowns.

In the aftermath of those ethical lapses, a lot has been done to begin the process of restoring trust. But while the Sarbanes-Oxley Act is expected to go a long way toward that goal, it's important to realize the law is not a comprehensive solution.

The real key is a company's culture. FedEx has worked hard to build a culture that includes a history of strong internal financial controls and clear and transparent disclosures. The issue of ethics goes further than accounting and disclosure, and the benefits of a strong ethical culture go much further than regulatory compliance. Companies able to distinguish themselves through a strong ethical reputation are invariably more attractive to investors. In fact, a number of large funds now have governance and ethics analysts to factor those issues into investment decisions.

Ethics can also be an advantage in attracting high-caliber employees. And employees who self-select based on ethical criteria will, in turn, build on an already strong foundation.

Any effort to formalize a culture of ethics should focus on employee behavior, and should include three basic components:

* Define your philosophy and corporate values in a mission statement.

* Develop guidelines for employees.

* Establish a formal channel for employees to report violations.

The mission statement and values represent an organization's core beliefs and goals, telling why a company is in business as well as how the company intends to conduct its business. A well-written statement sets expectations for employees even before their first day on the job.

But employees also need a comprehensive set of guidelines to follow. Many companies have a code of conduct to serve this purpose. A code of conduct includes specific policies to address issues such as accepting gifts from vendors or using company resources for personal reasons, but it also provides guidelines to address broader areas such as conflicts of interest.

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Ideally, the code of conduct should be a reference guide rather than a training manual--offering direction to employees as they encounter specific situations.

And employees need a means to report suspected violations. Obviously, you can't control the actions of every employee--there are more than 250,000 employees and contractors around the world at FedEx. But if you've been effective in communicating the importance of ethics throughout your organization, your people will take a personal stake in protecting your reputation.

Our employees are encouraged to communicate their concerns to management, and our open-door policy included in our code of conduct defines this process. For employees who aren't comfortable voicing concerns to management, FedEx has a toll-free Alert Line. To ensure confidentiality, a third party administers the program.

Of course, no matter how effectively you communicate the importance of ethics through formal channels, the actions of corporate leadership will always be the greatest influence on employee behavior. Any perceived shortcut or bending of the rules by senior management will contradict your message.

FedEx uses a code of conduct questionnaire to verify senior management is using good judgment and abiding by the formal policies. This document, distributed annually, covers all major areas of ethical misconduct. The questionnaire is completed and signed by every member of senior management (myself included), and the certified document is returned to our legal department for review. Obviously, there's nothing to prevent a dishonest person from giving a false answer, but the process serves as an annual reminder that unethical behavior is not tolerated.

Strong ethics ultimately come down to individual judgment. Only a solid culture can drive good judgment and help employees navigate the gray areas they'll inevitably encounter.

Alan B. Graf Jr. is executive vice president and chief financial officer of FedEx.