Category: Compliance Programs

World’s Most Ethical Companies 2010 Edition

2010 World’s Most Ethical Companies

Ethisphere Institute just announced its list of the World’s Most Ethical Companies for 2010.

Of the 100 companies on their list, 26 are new to the list. The sole winner for the real estate industry is Jones Lang LaSalle. For the financial services industry there were three companies: American Express, The Hartford and The Principal Financial Group.

A tidbit that caught my eye was the comparative performance of the companies. Ethisphere claims that the “2010 World’s Most Ethical Companies have outperformed the S&P 500 by delivering a 53 percent return to shareholders since 2005—compared to the S&P’s four percent shareholder loss over the same period.”

It’s interesting to see that these companies consistently outperformed the broader in good times and bad. I’m tempted to go back through all of the past winners to see how it would have worked out by investing in these companies over the years. (If I could just find the time to do so.)

Ethisphere’s looks at 7 categories under their “Ethics Quotient”:

  1. Corporate citizenship and responsibility (20%)
  2. Corporate governance (10%)
  3. Innovation that contributes to public well being (15%)
  4. Industry leadership (5%)
  5. Executive leadership and tone from the top (15%)
  6. Integrity track record and reputation (20%)
  7. Internal systems and ethics/compliance program (15%)

SEC Warns Firms on Muni Pay-to-Play Rules

While sources are wallowing in the exposure of a political figure in a “pay to play” scandal, I thought there might be some lessons for other investment managers as states and perhaps the SEC roll out limitations on political contributions.

The original story seemed mildly interesting.  The SEC warned firms that municipal securities rules prohibiting pay-to-play apply to affiliated financial professionals, not just a firm’s employees. The story caught my eye because MSRB Rule G-37 was identified as a model for the SEC’s proposal on pay to play.

The SEC wanted to make it clear that an “executive who supervises the activities of a broker, dealer, or municipal securities dealer is not exempt from the MSRB’s pay-to-play rule just because he or she may be outside the firm’s corporate governance structure.”

The SEC report identified JP Morgan and the Treasurer of the State of California, but did not name names. It did not take much research to find out that Phil Angelides was treasurer at the time of the incident. The Wall Street Journal identified the JP Morgan executive as David Coulter who was the vice chairman who oversaw the bank’s investment-banking business.

“On September 10, 2002, the Vice Chairman forwarded an invitation for the California Treasurer’s New York fundraising event to JP Morgan Chase’s executive committee and to its Vice President for Government Relations with a handwritten note stating that the California Treasurer is an important client and soliciting their help in raising $10,000 for the event.”

That is exactly the sort of behavior that the SEC wants to prohibit with MSRB Rule G-37 and its proposed pay to play rule.

A key takeaway from the report is that the SEC will look “to the activities, not merely the title, of an associated person in determining whether the person is” subject to the pay to play restrictions.

The story gets juicy because Mr. Angelides is currently the Chairman of the Financial Crisis Inquiry Commission. The Financial Crisis Inquiry Commission was established under the Fraud Enforcement and Recovery Act of 2009 to “examine the causes, domestic and global, of the current financial and economic crisis in the United States.” Perhaps his own situation will be an example in the FCIC’s report due on December 15.

Sources:

Blogoversary!

anniversary present

Instead of substantive information, today’s post focuses on me and this website.

Compliance Building went public on February 12, 2009.  Since then, it looks like I have managed to get out a blog post every business day.  Sometimes, more than one.

Thanks for reading. If you haven’t done so already, you can subscribe and have my posts sent to you. It’s free, except on the Kindle. (I can’t convince Amazon to change the price.)

I started my first blog, KM Space, on this day in 2007. I set up Real Estate Space a few months later. Now I’m moving into my fourth year blogging.

Here are some statistics from the past three years:

Posts
Compliance Building 873
KM Space 614
Real Estate Space 144
Total: 1631

I hope at least some of those posts were useful to you, whether you are a subscriber or one of the other 90,000 or so visitors to Compliance Building.

Why do I do this? I publish because the information is useful to me, but I’m happy to have you along for the ride. (I put down my thoughts in more detail in the Why I Blog page.) This blog is a personal knowledge management tool.

For those of you who know me from KM Space, I will continue to publish a subset of my posts to the KMspace feed. No need to say goodbye. Unless I’m boring you.

Image is from Petr Kratochvil at publicdomainpictures.net.

Proposed Amendments to Sentencing Guidelines

The United States Sentencing Commission has proposed some changes to the Federal Sentencing Guidelines. Of the eight changes, one should catch the eye of compliance professionals.

There is a proposed amendment to Chapter Eight of the Guidelines Manual regarding the sentencing of organizations, including proposed changes to §8B2.1 (Effective Compliance and Ethics Program) and §8D1.4 (Recommended Conditions of Probation — Organizations).

§8B2.1

In §8B2.1 (Effective Compliance and Ethics Program) they are inserting a new Note 6 that would add a new requirement for an effective compliance and ethics program. The note focuses on the steps to take after the detection of criminal conduct.

First, the organization must respond appropriately to the criminal conduct, including restitution to the victims, self-reporting and cooperation with authorities.

Second, the organization must assess its program and modify it to make the program more effective. They seem to encourage the use of an independent monitor to ensure implementation of the changes.

§8D1.4

The proposed amendment amends §8D1.4 (Recommended Conditions of Probation – Organizations) (Policy Statement) to simplify the recommended conditions of probation for organizations. The new section consolidates the list of conditions that are appropriate conditions for probation.

Request for Comments

In addition to the proposed amendment the Sentencing Commission has is considering an issue and are asking for comment:

Should the Commission amend §8C2.5(f)(3) (Culpability Score) to allow an organization to receive the three level mitigation for an effective compliance program even when high-level personnel are involved in the offense if

(A) the individual(s) with operational responsibility for compliance in the organization have direct reporting authority to the board level (e.g. an audit committee of the board);
(B) the compliance program was successful in detecting the offense prior to discovery or reasonable likelihood of discovery outside of the organization; and
(C) the organization promptly reported the violation to the appropriate authorities?

Written comments are due by March 22, 2010.

Sources:

Dan Pink on the Surprising Science of Motivation

Dan Pink, at TED Global in July 2009, broke tasks, performance and rewards for performance into two groups. With complex problems, financial rewards do not impact performance and seem to dull creativity. Actually, they seem to deter performance. With a simple problem and a simple set of rules, then contingent motivations for performance (like financial rewards) are very effective.

He comes to three conclusions:

  1. The twentieth century rewards that we think are part of business do work, but only in a surprisingly narrow band of circumstances.
  2. “If, then” rewards often destroy creativity.
  3. The secret to high performance is not rewards and punishments, but that a drive to do things because they matter.

There are some great lessons for compliance and corporate governance in the presentation. He explains it much better than I can. Take the 19 minutes to watch the video.

I have his book Drive: The Surprising Truth About What Motivates Us on my reading list. After watching this video, I have moved it higher up in the queue.

Thanks to Jack Vinson of Knowledge Jolt with Jack for pointing out this video: What is the right culture for your organization?

Global Ethics Summit Update

Global Ethics Summit

Dow Jones and Ethisphere Institute are teaming up to present the 2010 Global Ethics Summit on February 23-24, 2010 at the Grand Hyatt New York City.

I will be attending, thanks to an offer from the event’s organizers. If you are interested in attending I can offer you a 15% discount on regular conference fees, available by registering online (http://www.globalethicssummit.com/register) with the code “GES10P”.

They just added two new keynote speakers:

  • Mark Mendelsohn, Deputy Chief of Fraud Section, Criminal Division, U.S. Department of Justice
  • C. Turney Stevens, Dean, College of Business, Lipscomb University

They will be joining the other previously announced speakers:

  • Brackett Denniston, Senior Vice President & General Counsel, General Electric
  • Charles L. Harrington, Chairman & CEO, Parsons
  • Andy Hinton, Chief Compliance Officer & Associate General Counsel, Google
  • Georg Kell, Executive Director, United Nations Global Compact
  • Douglas M. Lankler, Senior Vice President & Chief Compliance Officer, Pfizer

I also need to disclose that they gave me a pass to attend as a media sponsor of the event. You can see Compliance Building listed as a media sponsor. In exchange, I’m writing a few blog posts leading up to the summit and will be live-blogging from it.

Global Ethics Summitt main banner

Martin Luther King, Jr.

I Have a Dream – Address at March on Washington August 28, 1963.

“I have a dream that one day this nation will rise up and live out the true meaning of its creed: ‘We hold these truths to be self-evident, that all men are created equal.'”

“Let freedom ring. And when this happens, and when we allow freedom ring—when we let it ring from every village and every hamlet, from every state and every city, we will be able to speed up that day when all of God’s children—black men and white men, Jews and Gentiles, Protestants and Catholics—will be able to join hands and sing in the words of the old Negro spiritual: “Free at last! Free at last! Thank God Almighty, we are free at last!”

Sources:

SUPERfreakonomics and Compliance

superfreakonomics

Steven D. Levitt and Stephen J. Dubner are back putting the freak in economics. As they did in Freakonomics, SUPERfreakonomics uses economic analysis to give some insights into actual human behavior.

When the original Freakonomics came out it was very original. Since then other books have hit the mainstream trying to do the same thing, most notably Malcolm Gladwell. SuperFreakonomics is good but comes across as much less original than the original. There are many other reviews of the book by people more competent at book reviews than me. The authors’ take on global warming has stirred up lots of controversy.

SuperFreakonomics has plenty of stories that compliance professionals should find interesting. It’s certainly worth your time to read the book.

One item in the book that caught my interest was some research by Melissa Bateson in her department’s break room. Faculty members paid for coffee and beverages by dropping money into an “honesty can.” Each week professor Bateson posted a new price list. She didn’t change the prices, but she did post a different photograph on the list each week. She alternated between using a picture of flowers and using a picture of human eyes.

i'm watching you

When the eyes were watching, nearly three times as much money ended up in the honesty can. Cues of being watched enhance cooperation in a real-world setting (.pdf) by Melissa Bateson, Daniel Nettle and Gilbert Roberts, published in Biology Letters 2006.

“We believe that images of eyes motivate cooperative behaviour because they induce a perception in participants of being watched. Although participants were not actually observed in either of our experimental conditions, the human perceptual system contains neurons that respond selectively to stimuli involving faces and eyes, and it is therefore possible that the images exerted an automatic and unconscious effect on the participants’ perception that they were being watched.”

Maybe I will scrap using my corporate signature in email and use that last set of eyes.

What are your thoughts?
eyes im watching you

Public Companies Fail to Disclose Ethics Waivers

usha rodrigues

According to Usha Rodrigues from University of Georgia Law School and Mike Stegemoller from Texas Tech University – Rawls College of Business, in their paper Placebo Ethics, public companies are failing to disclose ethics waivers.

They focused on Section 406 of Sarbanes-Oxley which requires public companies to disclose when they have granted an ethics waiver to top executives. Section 406(b) states:

“The Commission shall revise its regulations concerning matters requiring prompt disclosure on Form 8-K (or any successor thereto) to require the immediate disclosure, by means of the filing of such form, dissemination by the Internet or by other electronic means, by any issuer of any change in or waiver of the code of ethics for senior financial officers.”

The regulations for Section 406 provide:

§229.406 (Item 406) Code of ethics:
(a) Disclose whether the registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. If the registrant has not adopted such a code of ethics, explain why it has not done so.

(b) For purposes of this Item 406, the term code of ethics means written standards that are reasonably designed to deter wrongdoing and to promote:

(1) Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; …

Rodrigues and Stegemoller were able to take advantage of the overlap between the 406 disclosure requirements and the disclosures required by Item 404 of Regulation S-K for related party transactions with an amount in excess of $120,000. One of the challenges of determining compliance with disclosure requirements is you can’t tell if there was a need for a disclosure unless the information is disclosed. This overlap allowed them to find items in the 10-k proxy statement that should have been reported immediately under Section 406.

Their sample set was 200 public companies. From January 1, 2003 through December 31, 2007 they found only one waiver filed under Section 406 for these 200 companies. They also looked beyond their sample set and found that of the 5,000± public companies there have only been 36 waivers filed using Form 8-K.

They took the next step and looked at the 10-K filings for their sample set of companies for related party transactions. Fifteen companies failed to disclose related party transactions that should have been reported immediately under Section 406. They found lots of other disclosures that were in a gray area. (This should be no surprise to Michelle Leder at Foototed.org who loves finding these things.)

One theory is that the public companies prefer to dump these related party transactions into the 10-K proxy statement where there is already a flood of information rather than specifically calling out the transaction in a separate Form 8-K. (Again, Michelle Leder loves digging up this stuff.) There is a difference between immediate disclosure and eventual disclosure.

Another surprise in the paper was that most of the companies in the sample set did not prohibit related party transactions in their code of ethics. Only 30 prohibited these transactions. These omissions also would appear to be a violation of Section 406 since the regulation requires a code to deal with conflicts of interest. Personally, I don’t see how you can call something a code of ethics if it does not prohibit related party transactions.

References: