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
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
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

3

Governance Paradigm
Changes
Stakeholder AccountabilityDependency
Puts a Greater Premium on:

Ethics
Ethics
Ethics
Ethics
Ethics

awareness and risk assessment

guidance and culture
strategies and programs
management mechanisms
compliance mechanisms and feedback

Need for an ethical culture/ethics program

L.J. Brooks, Rotman School of Management, University
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Enrons Culture Ethical?

Ethical whats 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

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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
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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
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Unethical Culture
Vulnerabilities
Directors & Officers 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

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
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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

10

Reputation Management
A New Stakeholder-Based
Model
Competitive
Advantage

Top
Management
Values

Strategic
Plan

Organizational
Processes

Identity

Reputation

__Stakeholder Screen__
Values__

Principles

Emotion

Honesty
Fairness
Compassion
Integrity
Predictability
Responsibility

Trustworthiness Trust

Media
Image

Credibility
Reliability
Responsibility

Respect
Image
Management

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

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New Board Responsibilities

Comprehensive Risk Management

Broad understanding of business model

Financial literacy
Guidance & Control framework
Focus on corp. culture, ethics & reputation
Business ethicswhistleblower protection plan
Ethics Risk Management

Trust, but challenge, dont turn away

Caremark National Case, trend

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

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L. Brooks

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

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Comprehensive Risk
Management
includes Ethics Risk
Ethics
Risk
Reputation
Success
Management

Reputation is important
Arthur Andersen
survival
RT Capitalreputational capital
Tylenol competitive
advantage
Selling trust and credibility, not pills,
L.J. Brooks, Rotman School of Management, University
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L. Brooks

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
Enrons Board failed to consider fully!
Few corporations do A, fewer do B!

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

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L. Brooks

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

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Identifying Ethical Operating Values

PURE ETHICAL VALUES

Respect for rights of

individual
stakeholders

ETHICAL OPERATING
VALUES
Honesty, integrity,
accuracy, recognition
of stakeholder rights
incl. environment
Control of self-interest

Fairness between
stakeholders
Maximize overall
benefits

Profit is our goal , but

not at any cost

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

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Corporate Citizenship
Options

Chris Marsden, Business & Society Review, Spring 2000, Vol. 105:1, 9-25,
p. 17.

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

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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

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Code Guidance Alternatives:

Control/Motivation Signaled
Guidance Provided
Signaled

Control/Motivation

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

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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
Issuesoriented 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

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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

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

Profitability & legality Shareholders +

Fairness & rights Specific Stakeholders

Expectations Gap . the Public Interest

L.J. Brooks, Rotman School of Management, University
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Compliance requires
Measurement

If you cant measure it, you cant 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

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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

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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

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Ethics Audits & Programs

Ethics audits provide assurance that operations are

ethical (in accord with ethical principles), & assess risks
Use investigative techniques:

Dow Cornings, CEMs 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

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Publicly-Available Corporate Social

Audits
Externally Verified
Social Audit
Ben & Jerrys (US)
BP Amoco (UK)
Novo Nordisk (Den.)
Ford (US)
Shell Intl (Neth.)
Heritage
Body Shop Intl (UK)
Credit(Can)
HBO Origin (Swed.) Cooperative Bank (UK)
Metro Credit (Can.) Van City Savings
Credit Union (Can.)
Sbn Bank (Switz.)
Partial List August 2000

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

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Development and Maintenance

ofStepAnPurpose
Ethical 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 organizations ethical practices,
and its network of stakeholders and interests
Ethics Risk AssessmentTo 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

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