Enron Case Debrief

 Group discussion:
 What ethical problems caused the Enron
fiasco?
 Who was responsible?
 How could the problems have been
prevented?
 Class discussion and debrief

L.J. Brooks, Rotman School of Management, University of Toronto 1

Overview of Key Problems
 Governance failure at the Board level:
 Too much trust

 Incompetence - awareness and/or

understanding of role , control & reporting

systems
 Lack of motivation, conflicts of interest

 Dishonest management, conflicts of interest

 Culture of deception, self-interest
 Manipulation of accounting and disclosure
 Poor standard setting
 Auditor deficiencies
 Regulatory short-sightedness
L.J. Brooks, Rotman School of Management, University of Toronto 2
Ethical Impacts
 Greater awareness of ethical issues
 Greater general and specific
accountability and responsibility
 Governance from the top - board
 More likelihood of discovery
 Higher reputational risks
 Ethics programs will have to work
L.J. Brooks, Rotman School of Management, University of Toronto 3
 Governance Paradigm Changes
Stakeholder Accountability…Dependency
Puts a Greater Premium on:
 Ethics awareness and risk assessment
 Ethics guidance and culture
 Ethics strategies and programs
 Ethics management mechanisms
 Ethics compliance mechanisms and feedback
Need for an ethical culture/ethics program
L.J. Brooks, Rotman School of Management, University of Toronto 4
Enron’s Culture… Ethical?
 Ethical… what’s ethical?

 Does it foster actions that respect the

interests & rights of stakeholders?

 Does it meet the expectations of

stakeholders?

L.J. Brooks, Rotman School of Management, University of Toronto 5

 Building an Ethical corporate culture/
Ethics program
 Strategic focus - comprehensive, directive
 Assign responsibility
 Identify and assess risks and opportunities
 Code of conduct - values, guides
 Governance & reporting - explicit part, time, energy
 Measurement of performance
 Ethics audits and targeted programs
 Management of ethical risks & opportunities

L.J. Brooks, Rotman School of Management, University of Toronto 6

Ethical culture supports guidance
 To offset vulnerabilities:
 directors
 reputation

 internal control

An Ethical Culture
Begins with Ethics Risk Assessment

L.J. Brooks, Rotman School of Management, University of Toronto 7

Unethical Culture… Vulnerabilities
Director’s & Officer’s Concerns
 Strategic risks - reputation
 Innovation risks - trust

 Recruiting, retention risks

 Performance risks - morale

 Accountability risks - integrity

 Compliance risks - internal control

L.J. Brooks, Rotman School of Management, University of Toronto 8

 Identify & Assess Risks & Opportunities
 Part of strategic planning process
 Assessment of possible impacts and interests of
present and projected stakeholders in short-,
medium-, and long term time horizons
 Part of MBO and unit annual objectives
 Internal and external horizon scans
 Crisis management planning & rating systems
 Feed-forward to board and strategic planning
processes

L.J. Brooks, Rotman School of Management, University of Toronto 9

What is an Ethics Risk?
An Ethics Risk occurs when …
 stakeholder expectations may not be met
 a difference may develop between
organizational, employee and stakeholder
values

 time is a factor because stakeholders are

members of dynamic networks
 consider gap analysis

L.J. Brooks, Rotman School of Management, University of Toronto 10

 Reputation Management
A New Stakeholder-Based Model
Competitive
Top Advantage
Management
Values

Strategic Organizational
Processes
Identity
Plan
Reputation
__Stakeholder Screen__ Media
Values__ Principles Emotion
Honesty Trustworthiness Trust
Fairness
Compassion Image
Integrity Credibility Respect
Predictability Reliability
Image
Responsibility Responsibility
Management

L.J. Brooks, Rotman School of Management, University of Toronto 11

 New Board Responsibilities
 Comprehensive Risk Management
 Broad understanding of business model
 Financial literacy
 Guidance & Control framework
 Focus on corp. culture, ethics & reputation
 Business ethics…whistleblower protection plan
 Ethics Risk Management
 Trust, but challenge, don’t turn away
 Caremark National Case, trend

© L. Brooks
L.J. Brooks, Rotman School of Management, University of Toronto 12
 Comprehensive Risk Management
requires understanding the business
Risk Events Causing Drops of Over 25% Share Value,
Percentage of Fortune 1000 companies, 1993-1998

Strategic ……………………………. 58%

Customer demand shortfall (24) Competitive pressure (12)
M & A Integration problems (7) Mis-aligned products (6)
Operational …………….31%
Cost overruns (11) Accounting irregularities (7)
Management ineffectiveness (7) Supply chain pressures (6)
Financial ………..6% [Foreign macro-eco, interest rates ]
Hazard …….0% [Lawsuits, natural disasters]
Source: Mercer Management Consulting/Institute of Internal Auditors, 2001

L.J. Brooks, Rotman School of Management, University of Toronto 13

 Comprehensive Risk Management
includes Ethics Risk Management

Ethics Risk Reputation Success

Reputation is important
 Arthur Andersen…………… survival
 RT Capital…………reputational capital

 Tylenol ……………competitive advantage

Selling trust and credibility, not pills, …

© L. Brooks
L.J. Brooks, Rotman School of Management, University of Toronto 14
 Comprehensive Risk Management
depends upon the
Corporate Ethical Culture
 Comprehensive Risk Management utilizes both:
A. Key risk factor identification & measurement
B. Review of key business processes including the ethical
culture that underpins process integrity
 Ethical culture provides guidance for employees
about when to adhere to the Code, when actions are
not covered in Code, in a grey area, or in a crisis -
tools to measure ethical culture do exist
Enron’s Board failed to consider fully!
Few corporations do A, fewer do B!

© L. Brooks
L.J. Brooks, Rotman School of Management, University of Toronto 15
Creating The Right Culture

 Culture = the way we do things around here

 Culture = broader values + normative patterns
which guide employee behaviour ...(Ouchi,
1979)

 Consider creating a proactive ethical culture

 Leadership

 Based on sound ethical values

L.J. Brooks, Rotman School of Management, University of Toronto 16

Identifying Ethical Operating Values

PURE ETHICAL VALUES ETHICAL OPERATING

VALUES
 Respect for rights of  Honesty, integrity,

individual stakeholders accuracy, recognition of

stakeholder rights incl.
environment
 Control of self-interest
 Fairness between
stakeholders
 Maximize overall  Profit is our goal , but
benefits not at any cost

L.J. Brooks, Rotman School of Management, University of Toronto 17

 Corporate Citizenship Options
Chris Marsden, Business & Society Review, Spring 2000, Vol. 105:1, 9-25, p. 17.
Corporate Denial Reactive Pro-active
Citizenship Engagement Engagement
Company
Objectives

7 8 9
Triple Bottom Line Reactive Holistic Active Sustainability
Environmental Engagement Leadership
Social Impact assessment, Risk analysis Triple bottom line accountability and
Financial Stakeholder partnership building audit, integrated management
‘Hard reporting’ systems
4 5 6
Shareholder Value Devolved External Reactive Partial Pro-active Partial
Affairs Engagement Engagement
PR/sponsorship ISO 14001 Stakeholder
Local community SA 8000 partnership building
investment Policy statements Pioneering new code of
‘Soft reporting’ conduct or monitoring system
1 2 3
Managerial Discretionary Specialist Reporting Specialist Intervention in Societal
Satisficing Philanthropy To CEO issues
Chairman’s wife % club, Co. Foundations Strategic Philanthropy

L.J. Brooks, Rotman School of Management, University of Toronto 18

 Ethics Program Orientation Types
Orientation Primary Focus
Compliance-based Preventing, detecting, and punishing
violations of the law
Integrity or Values-based Defines organizational values and
encourages employee commitment
Satisfaction of external stakeholders Improvement of image with and
relationships with external stakeholders
(customers, the community, suppliers)
Protect top management from blame “CYA” or cover your ___

Combinations of the above Values and compliance-based, for example

__________________________________________________________________
Sources: Trevino, Weaver, Gibson and Toffler, Cal. Mgt. Rev., 1999, and Paine, HBR,
1994, 111; Badaracco & Webb, 1995, 15.

L.J. Brooks, Rotman School of Management, University of Toronto 19

 Code Guidance Alternatives:
Control/Motivation Signaled
Guidance Provided Control/Motivation Signaled

Obey these rules Imposed Control

Seek advice before acting
Act on your best judgement,
but disclose what you have done
Guiding principles which indicate
“this is what we are and
what we stand for” Self-control
________________________________________________________________
Sources: See reading by Clarkson & Deck, 1992, or Clarkson, Deck & Leblanc, 1997.
Website: www.nortelnetworks.com/corporate/community/ethics/index.html

L.J. Brooks, Rotman School of Management, University of Toronto 20

 Patterns of Ethics Statements/ Corporate Codes

Organizing Focus Characteristics

Stakeholder/constituent Introduction + discussion by stakeholder of
principles, objectives and policies
Strategic policy or Foreword by CEO, chair, president, introduction,
responsibility purpose, objectives, policies, mgt. philosophies
Issues–oriented or One issue after another
corporate mission
Description Depth of Coverage
Credo Inspirational short statement on key values
Code of Ethics Deals with ethics principles (short)
Code of Conduct Deals with principles + additional examples, etc.
Code of Practice Detailed rules of practice

L.J. Brooks, Rotman School of Management, University of Toronto 21

Principles of Stakeholder Management
Ethical performance should be managed to
maintain support of the stakeholders:
Acknowledge & monitor concerns
 Listen & communicate
 Adopt sensitive processes and behaviour
 Recognize interdependence
 Work cooperatively
 Avoid jeopardizing inalienable human rights
 Acknowledge potential conflicts
Clarkson Centre Publication, 1999

L.J. Brooks, Rotman School of Management, University of Toronto 22

 Emerging Risk-oriented
Decision Criteria for Directors
Criteria (New) Interests/Risks Considered

 Profitability & legality …… Shareholders +

 Fairness & rights …… Specific Stakeholders

 Expectations Gap ………. the Public Interest

L.J. Brooks, Rotman School of Management, University of Toronto 23
 Compliance requires Measurement
 If you can’t measure it, you can’t manage it
 Ethics/Corp. Social Performance (CSP) feedback
 Company objectives

 Personal objectives

 Reinforcement decisions

 Evaluation of management

 Compliance disclosures - environment, labour, ISO

 Stakeholder interest
 Creation of a competitive image
 Website: www.globalreporting.org for GRI initiative

L.J. Brooks, Rotman School of Management, University of Toronto 24

CSP Measurement/Reporting Techniques
 Descriptive analysis (CEM, LJB list)
 Numerical indicators
 Expenditure analysis
 Cost-benefit analysis
 Categorization:
 Problems:
 Which impacts?

 Objectivity, surrogate measures

 Comprehensiveness... Credibility

 Examples: Levi Straus...

L.J. Brooks, Rotman School of Management, University of Toronto 25

 Dow Corning Breast Implant Case

A company with a highly regarded ethical

culture and an ethics audit process:
 Mindset:
 Scientific, self-interest, support needed from

culture
 Ethics Audit Process Flaws …
 Commitment: strategic & continuing
 “Vanity product”

L.J. Brooks, Rotman School of Management, University of Toronto 26

 Ethics Audits & Programs
 Ethics audits provide assurance that operations are ethical
(in accord with ethical principles), & assess risks
 Use investigative techniques:

 Dow Corning’s, CEM’s reporting dimensions

 Observation, surveys, sniff tests

 Governance review (E & Y), Reputation Mgt. (PwC)

 Use whistleblowing & complaints as red flags

 Ethics programs - Pollution reduct., family life, child care

 Mechanisms for buy-in
 Website: www.cepaa.org for SA8000 audit approach

L.J. Brooks, Rotman School of Management, University of Toronto 27

Publicly-Available Corporate Social Audits
Social Audit Externally Verified
 BP Amoco (UK)  Ben & Jerry’s (US)

 Ford (US)  Novo Nordisk (Den.)

 Heritage Credit(Can) Shell Int’l (Neth.)

 HBO Origin (Swed.)  Body Shop Int’l (UK)

 Metro Credit (Can.)  Cooperative Bank (UK)

 Sbn Bank (Switz.)  Van City Savings Credit

Partial List August 2000 Union (Can.)

L.J. Brooks, Rotman School of Management, University of Toronto 28

Development and Maintenance
ofStepAn EthicalPurpose
Corporate Culture
Assign responsibility: Successful initiatives usually involve:
Chairman or CEO top level accountability and adequate budget
Ethics Officer champions, arbiters
Ethics Committee monitoring, feedback, advice and cheerleading
Ethics Audit To understand the organization’s ethical practices,
and its network of stakeholders and interests
Ethics Risk Assessment To identify important ethics problems that could arise
Top management support Assess – absolutely vital to success
Develop consensus on key ethical values Necessary to frame policies and procedures
Develop code of conduct and ethical Provide guidance for employees & all other stakeholders
decision making criteria and protocols incl. sniff tests.
Develop ethics program: To successfully present and provide supporting
Leaders involvement mechanisms for the guidance process
Launch & subsequent training
Reinforcement policies: Compliance Sign-off; Measurements of performance;
Include in strategic objectives and managers objectives; Include in monitoring and reward structures
Communications programs; Exemplar award system
Ethics inquiry service Information, investigation and whistleblower protection
Crisis management To ensure that ethics are part of survival reactions
Establish a review mechanism

L.J. Brooks, Rotman School of Management, University of Toronto 29