Converging Ethics, Governance, and Culture · Converging Ethics, Governance, and Culture ... Ethical vs. Legal Governance 6 ... Values • Attitude sets that influence behavior •

Converging Ethics, Governance, and Culture

Michael Brozzetti, CIA, CISA, CGEIT

"Safeguarding Reputation and Fiduciary Integrity"

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Disclaimer

The views and opinions expressed herein are solely

those of Boundless LLC and its principal, Michael

Brozzetti, and do not necessarily represent the views

and opinions of their partners, affiliates, or associates.

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A picture is worth a 1,000 words…

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The relation of Law and Ethics…

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Quotes on governance today…

“What we really need is a new paradigm for due diligence when it comes to fraud.” Former SEC enforcement attorney

“It’s really about intentional opaqueness where transparency is legally required. It’s about taking steps to hide the true nature of transactions…” Former Prosecutor of the U.S. Attorney’s Office

“I have discovered that greater government attention to corporate ethics and compliance activities is a smarter investment than endless federal prosecutions, suspensions, and debarments.” Former Federal Inspector General

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Ethical vs. Legal Governance

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Innocent

Not

Guilty

Guilty

Ethical Governance Legal Governance

“Not Guilty, Does Not Mean Innocent”

– University of Pennsylvania Law School Student

Judgment Systems and Governance

Measured to ethics and values

Internally controlled and adjudicated

Minimum exposure to civil and criminal liability

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Ethical Judgment Legal Judgment

Measured to law or regulation

Externally controlled and adjudicated

Maximum exposure to civil and criminal liability

Governance

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Governance

Culture Ethics

Governance Elements

People

Ethics

& Values

Internal Adjudication

Process

Internal

External

Technology

Systems / Devices Information / Data

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What area is most

important for

organizational success?

Governance Elements

People

Ethics

& Values

Internal Adjudication

Process

Internal

External

Technology

Systems / Devices Information / Data

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20th Century Governance Challenges

Ethics

Governance

Risk Management

Compliance

Internal Control

Communication & Trust

What state is the culture in?

Accountability and culpability Case law suggests that not knowing and

ignorance is a defensible claim.

Over 95% of lawsuits are

settled or dismissed

Disclosure, speed, and flow

of risk information Often filtered and distorted.

Level of transparency into the culture No practical way to continual monitor the “Soft controls” that shape

cultural norms and risk appetites.

Limited foresight into the cultural risks

that manifest misconduct and fraud.

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Governance Today: Still a Black Box?

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Ethics

Governance

Risk

Compliance

Internal Control

Communication and Trust

What state is the culture in?

Discovery risk Enterprise risk

The Convergence of EGC

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Governance

Culture Ethics

Governance is rooted in Ethics and Culture

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If you want to know the “Tone at the Top”

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Ethics

Governance

Risk Management

Compliance

Internal Control

Communication & Trust

Corporate Culture

… then listen to the “Song at the Bottom”

AICPA Audit Guide

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“The effectiveness of internal control

cannot rise above the integrity and

ethical values of the people who create,

administer, and monitor them.”

Ethics

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Governance

Culture Ethics

Principles, Values, and Ethics

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• Inform our choice of values, morals, and ethics. Principles

• Attitude sets that influence behavior Values

• Standards by which behavior is evaluated for their morality – their rightness or wrongness

Ethics

“Values motivate, morals and ethics constrain”

– Paul Chippendale

Case Study: Goldman Sachs

The federal government

charged Goldman Sachs

with fraud accusing the

firm of deceiving

investors who bought

mortgage bonds that

select clients already

knew were likely to fail.

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Case Study: Citi Group

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On November 28, 2012 the

Judge Jed Rakoff refused to

approve a settlement deal

between the SEC and

Citigroup for allegations that

Citigroup dumped dubious

assets onto investors whom

lost $700MM, while Citigroup

profiteered $160MM in the

deal.

Case Study: SEC Veteran Blows the Whistle

U.S. SEC

Mr. Darcy Flynn, a 13 year old veteran,

blows whistle to Congress (Committee on the

Judiciary )

Allegations that over 9,000 files related to

Matters Under Inquiry (MUIs) are

systematically destroyed over 17 years

Claims included the destruction of records

relating to Madoff, Goldman, Lehman, and

other important cases

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Honoring Public Service

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(11) Employees shall disclose waste, fraud,

abuse, and corruption to appropriate

authorities.

TITLE 5: ADMINISTRATIVE PERSONNEL: PART 2635—STANDARDS OF

ETHICAL CONDUCT FOR EMPLOYEES OF THE EXECUTIVE BRANCH

Trust in Public Service

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TITLE 5: ADMINISTRATIVE PERSONNEL: PART 2635—STANDARDS OF

ETHICAL CONDUCT FOR EMPLOYEES OF THE EXECUTIVE BRANCH

(c) A violation of this part or of supplemental

agency regulations, as such, does not create

any right or benefit, substantive or

procedural, enforceable at law by any

person against the United States, its

agencies, its officers or employees, or any

other person.

The Regulatory Ethics Effect on Boards

The fiduciary duty of corporate directors has

been understood to embrace the adoption and

maintenance of corporate compliance

programs that are designed to detect

corporate wrongdoing.

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Culture

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Governance

Culture Ethics

Cultural Tones

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Undertone Overtone

– Complacency, Laziness, and

satisfaction with status-quo

– Loose controls with

insatiable appetite for risk

– Short-term decision making

at the expense of long-term

benefit sustainability

– Autocratic and self-focused

cultures, internal politics,

power struggles

+ Strong cultural work ethic

that challenges assumptions

+ Tight controls with

thoughtful risk appetite

+ Balanced decision making

considering short and long

term benefit sustainability

+ Collegial and team-focused

cultures, “conscientious

employees,” balanced power

NACD Comment Letter to SEC

“A strong corporate culture is one of the best tools

a company has for combating fraud.”

- NACD Barbara Hackman Franklin

Rating Scale

1 2 3 4 5 6 7 8 9 10

Poor Excellent

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External Culture Benchmarks Industry Culture Benchmarks

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Note: Chart is for illustrative purposes only. Y = Year.

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Internal Culture Benchmarks Cultural Trend Analysis

Note: Chart is for illustrative purposes only. PY = Prior Year and CY = Current Year trending.

Cultural Assurance

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BU #3 Executive Survey CEO CFO COO VP HR CIO

Ethics & Governance 8.6 8.2 2.1 1.6 5.8

Risk Management 8.0 7.2 3.1 3.0 5.8 Strategic Planning 7.4 7.6 3.6 3.4 5.2 Management 7.6 7.8 1.4 1.8 5.4 Communication 5.4 6.0 1.1 1.0 4.8 Organization 6.2 7.8 1.8 2.0 5.8 Empowerment 7.2 7.6 2.5 2.0 5.4 Compliance (Audit & Quality) 8.0 4.8 2.3 2.0 6.6

CCI™ Composite Rating 7.3 7.1 2.3 2.1 5.6

Business Unit Survey Business Unit 1 Business Unit 2 Business Unit 3 Business Unit 4 Business Unit 5

Ethics & Governance 4.6 4.7 2.4 5.3 4.3

Risk Management 4.3 4.9 1.0 5.3 3.9

Strategic Planning 3.7 4.0 2.8 5.0 3.9

Management 3.6 4.1 1.3 4.9 3.5

Communication 5.0 5.6 4.3 5.9 5.2

Organization 4.0 4.8 2.5 5.1 4.1

Empowerment 4.5 4.9 2.8 5.6 4.5

Compliance (Audit & Quality) 5.2 5.4 3.8 5.6 5.0

CCI™ Composite Rating 4.4 4.8 2.6 5.3 4.3

Drill down and gain dynamic views into the

organizational corporate culture for internal

benchmarking

Internal Adjudication

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Code of Conduct

Code of Ethics (Per Professional

Practice Standards)

Company Policy

Regulation

Law

Business Issues

Legal Issues

Ethics Compliance

Ethics Compliance

Management (Independent of Incident)

Audit, Risk, &

Compliance

General Counsel External Legal Counsel

General Counsel

Independent Committee

Independent Committee

Independent Committee

Transparency into Incident Reporting

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# 1 # 2 # 3 # 4 # 5

Report Filings 16 12 28 25 21

Code of Conduct 5 4 15 5 8

Professional Conduct 4 5 6 5 6

Policy 4 2 3 12 4

Regulation 1 0 4 3 1

Law 2 1 0 0 2

Report Status

Open – In Queue 9 6 11 8 15

In Due Diligence 2 2 7 3 5

Resolved 5 4 10 14 1

Report Resolution (YTD) 1 2 9 2 4

Authority Change 0 1 3 0 2

Disciplinary Action Taken 1 0 4 1 2

Restitution 0 1 0 0 0

Prosecution 0 0 2 1 0

Average Cycle Time (Days) 102 82 55 77 89

Quality for the Ethics Compliance System

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Mission and Code

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Closing Quote

“A self-aware person will act completely within their

capabilities to their pinnacle, while an ignorant person

will flounder and encounter difficulty.”

- Socrates, Greek Philosopher

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Thank you! Michael Brozzetti, CIA, CISA, CGEIT Boundless LLC [email protected]

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"Safeguarding Reputation and Fiduciary Integrity"

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