Risk & Compliance

More Than Words

What's the difference between an ethics programme that will keep you out of jail and one that won't?
Janet KersnarOctober 3, 2008

Sympathy is not something often felt for a company with a corruption-riddled past. So what makes Siemens different? Two years after an avalanche of accusations hit the German electronics and engineering firm, anger, disgust and even disappointment certainly prevail. But it’s hard not to feel a little sorry for the company. Not because of the heads that have rolled — the chairman’s, CEO’s and CFO’s, among others. Nor because of the fines that it has paid, starting with a €200m penalty that a Munich district court ordered it to cough up following bribery charges in Nigeria, Russia and Libya. Siemens gets sympathy because of the Herculean task that it faces to restore its credibility — a task referred to by president and CEO Peter Loscher in the €72 billion firm’s latest annual report as his “highest priority.” The only way the job can be done is by proving that it is now a law-abiding company — no more bribes to government officials to win contracts, slush funds, money laundering or deals with shady middlemen.

Anyone involved in implementing an ethics compliance programme understands the enormity of the challenge. Siemens “is at the beginning of a very difficult change-management programme,” says Jermyn Brooks, director of the private-sector programme at Transparency International (TI), a nonprofit anti-corruption organisation. “If you’re a large company like Siemens, it can take several years to know that a compliance programme is working properly at all your subsidiaries.”

The consolation for Siemens’ new executive team is that misery loves company. Other companies in the same boat as Siemens include Deutsche Bahn, BAe Systems and Alstom. Although Siemens eclipses their recent scandals in terms of global publicity, the results of all of these ethics breaches are similar — battered reputations, bruised morale and costly investigations.

But companies no longer need to be hit by a scandal to realise that ethics programmes are essential. They are certainly now high on many CFOs’ agendas. Indeed, in a survey in early summer by the Chartered Institute of Management Accountants and the Institute of Business Ethics, nearly 60% of the 1,300 finance professionals polled globally said they contribute to their firm’s ethical performance, and 73% believed that ethical performance will become a formal part of their role in the next few years.

The reason for the increased attention is twofold, says Brooks of TI — fear and greed. “The fear is prosecution and imprisonment,” he says. “For the first time, partly because of scandals like Siemens, countries that were previously uninterested in investigating and prosecuting are now becoming quite active.” As for greed, he cites the growing interest in “socially responsible investment,” such as the FTSE4Good and Dow Jones Sustainability indices that include anti-corruption criteria.

Fraud Squads

It’s not that ethics programmes are a new idea — Siemens, after all, had one for years before its scandals were made public in 2006. It is the efficacy of such programmes that is being questioned as never before. A global survey of nearly 400 executives published earlier this year by PricewaterhouseCoopers and the Economist Intelligence Unit (a sister company of CFO Europe) found that most companies have, at a minimum, a code of ethics — be it a doctrine posted on an intranet or a booklet that’s handed out to employees. Yet the survey also found that nearly one-third of the respondents admitted that they have problems communicating or enforcing these codes, and less than one-quarter were very confident that their programmes would hold up if put to the test.

To find out what happens when programmes fail, look no further than the pharmaceuticals sector. Operating in a highly regulated industry, pharma companies have long been accustomed to heavy scrutiny from government watchdogs, the press and the general public. Yet, until recently, most of this scrutiny focused on the safety of drugs, rather than bribery or other forms of corruption. Codes of ethics were in abundance, but few pharma groups took a hard line enforcing them, particularly if it meant sacrificing financial targets.

That changed in 2000, when TAP Pharmaceutical Products — a joint venture between Abbott Laboratories in the US and Takeda Chemicals of Japan — pleaded guilty to a charge in the US of conspiring with doctors to overcharge government insurers, and was slapped with a staggering fine of $875m. The unprecedented amount sent shock waves through the industry. With close oversight, TAP had to implement a strict ethics programme set out by government officials. In dictating the terms, the US government provided the sector with a clear indication of what its expectations would be, focusing on sales and marketing activities that were common for pharma companies, such as inviting physicians out to lunch or to play golf.

The industry could see the writing on the wall. Failure to meet those expectations would mean more massive fines, not to mention even heavier oversight in the US and beyond. Galvanised, the big pharma firms came up with a collective solution, promoting self-policing via local and global industry associations. These groups have since developed voluntary ethics codes and run peer-review committees to investigate allegations of misconduct.

Within many pharma companies, meanwhile, great strides have been made in honing their own individual ethics programmes. Take Novo Nordisk. As with many Scandinavian companies, the DKr44.8 billion (€5.6 billion) Danish firm has long embraced “triple bottom line” business practices, “where everything we do needs to balance being financially viable with being socially responsible and environmentally concerned,” says Lise Kingo, Novo Nordisk’s executive board member and chief of staff.

It was only recently that Novo Nordisk decided to include business ethics in its triple bottom line charter. “What we realised in 2005 was that despite the fact that ethics had been built into every single policy, it is such a big issue for our company, as it is for other companies, that we wanted to be more specific,” she says. The result was a new set of procedures.

But Kingo didn’t want the company to stop there. “Most companies have codes and guidelines,” she notes. “The trick is to create a mindset that makes every single employee live the principles. It doesn’t work if it only happens in the boardroom.” Creating the right mindset has called for creative measures. For the past year, for example, staff can go online to find a role-play game with “real-life” ethical dilemmas, such as conflicts of interest or access to sensitive information, that they must sort out according to company code. Supporting the effort was a new legal compliance department set up last spring to offer ethics advice.

As for oversight, company values and ethics compliance is now monitored as part of internal non-financial audits run by what Kingo calls “facilitators.” Undertaking week-long onsite inspections of each business unit every three years, the facilitators — all senior staff, but from different parts of the company — work in pairs, assigned to different stages of the audit, from employee interviews to summary reports to the identification of steps to be taken if a weakness is identified The end result, says Kingo, is that “we have developed a system where we are just as quantitative and concrete when we do non-financial audits as when we do financial audits.”

What happens if there is an ethics breach? “If we have people who are extremely good at living up to the values of the company, but cannot meet business goals, we help them,” she says. “And if we have people who are extremely good at meeting business goals but cannot live up to the charter, we also help them. But if they don’t get it right within some months, we will help them find other opportunities outside of the company.”

Foreign Affairs

While the sales and marketing departments have been the primary ethics danger zones for pharma companies in recent years, companies in other industries often have greater worries about external suppliers and business partners. Under heavy fire for labour practices up and down their supply chains, the clothing and sporting-goods industry is a case in point.

As just one example, Adidas, a €10.3 billion German sporting goods firm, has been a member of the Fair Labor Association — an independent nonprofit organisation that audits supply chains — for the past ten years. For the past five years, Adidas has dispatched its own inspection team of more than 60 experts around the world to carry out hundreds of factory audits every year. The company has also been an industry pioneer in terms of transparency, publishing annual sustainability reports before many other companies started to do so.

But as the supply chains like those at Adidas stretch across the world, ethics programmes can be strained. A key question is whether companies should go to countries “that are so corrupt that it’s very difficult to extract themselves,” says TI’s Brooks. “You have to decide as a company whether you can cope with maintaining your standards in a corrupt environment.” The decision isn’t always black and white, he concedes, and many companies operate in countries where corruption is rife, “because they have been there historically or they believe they can manage those challenges. But they should justify that openly in their public reporting.”

At Adidas, “there are countries that we do not operate in due to political instability or other reasons,” says general counsel Frank Dassler. But where it does operate — including Bangladesh, the Philippines and Cambodia, countries perceived to be among the more corrupt according to TI’s rankings — the company runs “country risk profiling” as part of its factory-monitoring audits, helping it gauge the general suitability of the business environment. The findings — such as the number of partnerships in particular countries that it has terminated due to ethics breaches — are published in its annual sustainability reports.

Given its heavy external emphasis, Dassler was surprised to find that the company “didn’t have much” in the way of a formal internal ethics programme when he arrived at the firm four years ago. Step by step, he and his legal team of 12 have been building up an internal compliance unit. A code of conduct was introduced two years ago, with a global policy manual published shortly thereafter. More recently, Dassler’s team has set up the requisite whistleblowing hotlines and launched a 40-minute, multilingual online course to help increase awareness of the code. Is anything still missing? “Yes,” he jokes, “more patience — especially from the board.”

A Watershed Year

Progress is often slow, not just at Adidas. At Siemens, the ethics overhaul couldn’t begin before the previous compliance programme was dismantled, no small feat at a company entrenched in tradition, says Andreas Pohlmann, who joined Siemens as chief compliance officer a year ago. “When I took on the job, I went on the intranet to explore what this company had in terms of guidelines, rules and regulations,” he recalls. “In the written form, the company had everything that you would expect from a multinational in terms of rules and regulations. But if you dug down into the details, you would soon find that this company failed to communicate in the right way and to get the buy-in of the employees. This is now the major challenge for the compliance team.”

Pohlmann concedes that the first reaction of the new team was to churn out rules, in the belief that more explicit direction would make a break from previous practices. But all this did was “overwhelm” staff at a time when legions of lawyers and consultants had already descended in the aftermath of the bribery scandal.

With 2008 being “the watershed year” for the programme, Pohlmann sees “the pendulum swinging back a little” as the three main components of the programme kick in. On education, 120,000 employees have participated in a web-based compliance course since its launch last year. On detection, 142 internal investigations were launched in the first nine months of this year and 123 requests were received for a new employee amnesty scheme. And on responsiveness, Pohlmann’s team has grown from 86 members in 2006 — “far too few for a multinational company that has more than 400,000 employees,” he says — to 520 today. New auditing technology is also being rolled out to help increase decision-making transparency and accountability. In addition, the executive team has been on the road, conducting “compliance town hall meetings” with staff.

But to ensure buy-in beyond doubt, Siemens is pushing its programme further than most firms dare, tying ethics targets to annual bonus packages. After a pilot this year, 5,000 senior managers will soon be assessed on how well they implement the anti-corruption tool kit, and how misconduct cases are handled if they do arise. “If something comes up, we want it reported to corporate. This is something we can measure,” says Pohlmann.

When asked whether the new steps were working Pohlmann replies, “If you look at our business in the last 12 to 18 months, we have not seen any shortcomings in terms of order intake due to compliance behaviour. Everyone can now understand that operational excellence and ethical behaviour are not a contradiction of terms.”

Amid today’s heightened ethical awareness, few executives would disagree with Pohlmann. But as economies slow and profits are hard to come by, will ethics programmes be shifted to the back burner? “That’s a huge temptation for business people in difficult times,” says TI’s Brooks. “But I would warn against it. In difficult times, do companies drop their safety standards? It’s something that could come back and haunt you.” Just ask Siemens.

Janet Kersnar is editor-in-chief at CFO Europe.