Creating an

Ethical Culture
The Role of Boards & Corporate Governance
SM131
Ken Freeman
December 7, 2016

Everett W. Lord
Founding Dean
Boston University
College of Business Administration
Great purpose of business is service to society
Business is built on the virtues of honesty,
truthfulness, integrity, and reputation
Honesty is the cornerstone of business

Questrom Business Creed

We Believe In

TRUTH, the only foundation of success

SERVICE, the motive of business

The GOLDEN RULE, the unchanging standard

of conduct

The consciousness of SERVICE PERFORMED,

the sufficient reward of endeavor

Enablers of Ethical Culture

People
Processes
Measurements

Enablers of Ethical Culture: People

Board of Directors
Chairman
President & CEO
Senior Executives
Middle Management
ALL Employees

Board of Directors Role

Governance & Oversight

Duty of Loyalty Represent Interest of Owners

Duty of Care Understand the Company

Exercise Business Judgment Use Experience

Hire & Fire CEO Most Important Role

Board of Directors Role

Governance & Oversight

Independent and Management Directors

Committee Structure*:

Audit
Compensation & Benefits
Nominating & Corporate Governance
Finance
Regulatory, Compliance, & Government Affairs
Science, Technology, & Sustainability

*Johnson & Johnson

Boards Role in Ethical Decision-Making

Enablers
Set the Tone with CEO
Audit Committee
Compensation Committee

Detractors
Limited direct involvement by Board
Close relationships with management
Preference to avoid conflict with management

President and CEOs Role

Responsibilities

Runs the Company

Establishes the Strategy
Role Model for the Culture
Sets Financial and Non-Financial Goals
Achieves Results
Develops Leadership Talent

CEOs Role in Ethical Decision-Making

Responsibilities

Sets the Tone

Walks the Talk
Drives Accountability for Integrity
Gallup Survey: 71% of Employees say,
Integrity = #1 attribute desired in senior leaders

Enablers of Ethical Culture: Processes

Regulations

Standards

Training

Monitoring Systems

Enablers of Ethical Culture: Processes

Monitoring Systems

Code of Ethics
Conflict of Interest Policy
Annual Employee Certification
Safe Ways to Communicate Concerns

Trust . But Verify

Enablers of Ethical Culture: Measurements

Go Beyond the Financials

Employee & Customer Satisfaction

Supplier Satisfaction

Balanced Scorecard

Enablers of Ethical Culture

People
Processes
Measurements

The Fraud Triangle

Do
Rig
h

Opportunity to do wrong

Rationalize what went wrong

Pressure to do wrong

n
ro

W
Do

I play by the rules

+ Pressures + Opportunities
I dont play by the rules

Pressure to Perform

Pressures

Ethical Decision Points

Personal Stories

Dinner in Oklahoma
My first Supervisor says:
You pay for dinner and I will
authorize the expenses

Company Policy says: The Senior Manager must pay

A Very Early Test

Dinner in Oklahoma
What Would You Do?
Refuse to Pay the Bill
2. Refuse to Pay the Bill /
Report Incident
3. Pay the Bill
4. Pay the Bill / Report Incident
1.

Taxi in New York City

Colleague says: I will pay.
You take the receipt and file on
your expense report.
On my expense report I will say I
lost the receipt.
That way we both get reimbursed.
I do this all the time no one will
find out.

Keep This Among Friends

Taxi in New York City

What Would You Do?
File Expense Report
2. Not File Expense Report
3. Not File Expense Report /
Report Incident
1.

Corning Ware Sales in Korea

Sell Corning Ware through
Product Distributors to Retailers
Country Sales Manager
accepted Bribes: $2 M

Corning Ware Sales in Korea

What Would You Do?
Ignore the Situation
2. Warn the Sales Manager
3. Fire the Sales Manager
1.

Corning Ware Sales in Korea

Sell Corning Ware through
Product Distributors to Retailers
Country Sales Manager
accepted Bribes: $2 M
Does the Amount Matter?

$20M

Corning Ware Sales in Korea

What Would You Do?
Ignore the Situation
2. Warn the Sales Manager
3. Fire the Sales Manager
1.

Illegal Billing Practices

MetPath

U.S. Medicare Regulations

Lab Industry Fines = $1B

a CORNING
Clinical Laboratory

MetPath Fines > $200M

Culture of Entitlement

Illegal Billing Practices

MetPath

a CORNING
Clinical Laboratory

CEO Meeting with Senior

Leadership Team
COO (#2) says:
No one expects us to comply
with Medicare rules. There are
50,000 pages of regulations.

Illegal Billing Practices

MetPath

What Would You Do?

Nothing
2. Warn the COO
3. Fire the COO
4. Leave the Company
1.

a CORNING
Clinical Laboratory

Insuring Compliance
Weekly Values/Culture Dialogue
Code of Ethics
Online Compliance Training
Compliance Hotline
Quarterly Compliance Certification
No Securities Trading
Arrogance KILLS

Values Based Leadership

Sales
Cash Flow
Market Cap
# Employees
Vol Attrition

1996
1.6B
(0.2)B
0.35B
13K
45%

Values and Culture Create Value

Integrity is the Bottom Line

2004
5.2B
0.8B
9.0B
40K
11%

Defining Leadership

Leadership = Performance = f (Behaviors,

Results)
Strong

Behaviors

*
Weak

Results

Strong

A Unicorn in Crisis

Elizabeth Holmes, CEO

A Unicorn in Crisis
1.Why would Ms. Holmes overstate the
companys technological capabilities?
2.If you were a potential investor what
information would you want to have?
3.If you were a board member, how would
you advise Ms. Holmes now?

Ethical Companies
Ethisphere
Worlds 100 Most Ethical Companies

Ford Motor Company - US

HCA Healthcare - US
PepsiCo, Inc. - US
Schneider Electric SE - France
Tata Steel Limited - India

Creating an
Ethical Culture
The Role of Boards & Corporate Governance
SM131
Ken Freeman
December 7, 2016