Integrity Is a Strategy for Performance
Verschoor, Curtis C., Strategic Finance
THE ETHICAL FAILURES OF THE RECENT PAST triggered regulatory reforms that were based on improved integrity and ethical values. These reforms led to enhanced stakeholder expectations for improved governance. They also gave corporations the opportunity to utilize the resulting changes to achieve significant benefits. Consequently, the initiatives are triggering widespread reevaluations of what is perceived to be the best practices to manage and measure organizational performance.
One of the most recent initiatives, emphasizing the importance of an ethical culture in an organization, is the significant revision made to the judicial sentencing guidelines. On April 30, 2004, the United States Sentencing Commission sent to Congress major changes to the federal sentencing guidelines for organizations, which it believes should lead to a new era of corporate compliance. The amendment to the guidelines (Section 994(p) of title 28, USC) strengthens the criteria an organization must follow in order to create an effective compliance and ethics program.
The amendment provides that organizations must promote a culture that encourages ethical conduct and a commitment to compliance with the law. In particular, boards of directors and executives are required to assume responsibility for the oversight and management of compliance and ethics programs. Effective oversight and management presumes active leadership in defining the content and operation of the program. At a minimum, the amendment explicitly requires organizations to identify areas of risk where criminal violations may occur; train high-level officials, as well as employees, in relevant legal standards and obligations; and give their compliance and ethics officers sufficient authority and resources to carry out their responsibilities.
Other governance initiatives have set forth ethics requirements, including provisions in the Sarbanes-Oxley Act of 2002 and the revised listing standards for corporate governance set forth in late 2003 by the New York and NASDAQ Stock Exchanges.
A white paper by PricewaterhouseCoopers (PwC), "Integrity-Driven Performance: A New Strategy for Success Through Integrated Governance, Risk, and Compliance Management," has resulted from these developments. It introduces new research to support the premise that good governance--really a commitment to an ethical business environment--is a strong driver of business performance. The paper describes the necessity of balancing governance, risk management, and compliance processes with an emphasis on business integrity, values, and ethics integrated throughout an organization. Using the phrase coined by SEC Chair William Donaldson, the culture of ethics that the board of directors articulates for the organization must permeate "the spirit and very DNA of the corporate body itself--from top to bottom and from bottom to top." (From "Speech by SEC Chairman: Remarks at the 2003 Washington Economic Policy Conference," available at www.sec.gov/news/speech/ spch032403whd.htm.)
PwC describes the operating model that is helpful in bringing about integrity-driven performance. It's founded on three core principles:
* Effective integration of governance, risk, and compliance (GRC) processes, which fosters a culture of business integrity and accountability.
* Integrated GRC processes should link to value and coordinate people, processes, and technology so that an integrity-driven performance strategy is embedded within the fabric of the organization.
* Integrity-driven performance requires that businesses put stakeholders first, supporting the letter and spirit of laws and regulations.
Use of this strategy suggests that business integrity, ethics, and values don't detract from business performance. In fact, they add to it.
The white paper describes four enablers that are necessary to attain a level of integrity-driven performance:
* Initiate changes as necessary to instill or emphasize a culture of business integrity and ethical values. …