The Ethical Compass in Business Presented at Saint Louis University St. Louis, MO March 26, 2008 Mike Zychinski, Partner Deloitte & Touche LLP.

The Ethical Compass in Business

Presented at Saint Louis UniversitySt. Louis, MOMarch 26, 2008

Mike Zychinski, PartnerDeloitte & Touche LLP

Copyright © 2008 Deloitte Development LLC. All rights reserved. 2

Agenda

Introduction

Revisiting Corporate Scandals Of The 21st Century

Where Are We Today?

Does Being Ethical Mean You Have To Give Up Profits?

Let’s Discuss Some Ethical Dilemmas

Retaliation

Final Comments

Q&A


The Early Corporate Scandals of the 21st Century

• In the years following the turn of the 21st century, a wave of corporate scandals swept the United States, in the form of accounting scandals, insider trading, market timing / late trading, price fixing, etc.

• Involving, but not limited to, some the following organizations:— Enron/Arthur Andersen— WorldCom— Tyco— ImClone — AOL Time Warner— Xerox— Royal Dutch Shell— Rite Aid

Source: www.theecoa.org – Executive Director’s Perspective, July 2007


Results of and Reactions to the Scandals

• The reactions to these scandals were strong, swift, and overwhelmingly supported: the U.S. Congress passed the Sarbanes-Oxley Act of 2002, in the House of Representatives by a vote of 423-3 and by the Senate 99-0*

• A number of high profile trials led to the convictions of multiple individuals involved in the scandals, including fines and jail time for some

• Bankruptcies and insolvencies of various companies occurred

• A 2002 report, "The Cost of Corporate Recklessness" put the total costs of corporate scandals at more than $200 billion US dollars, which were in lost investment savings, jobs, pension losses, and tax revenue. And it estimated that more than a million workers lost their jobs at the affected companies**

Sources: * www.theecoa.org – Executive Director’s Perspective, July 2007** “The Cost of Corporate Recklessness” – produced by the No More Enron Coalition


So Where are we Today?

There continue to be news stories of ethics and

compliance issues, although perhaps not at the

same magnitude as a few years ago:

• Toy defects – Mattel

• “Pre-Texting” – HP

• “Sock Puppet” – Whole Foods Market

• Predatory Lending

Source: www.theecoa.org – Executive Director’s Perspective, December 2007


What are the Implications for Today’s Organizations?

• Focus on moving away from “rules-based” toward “principles-based” approach to accounting

• Continue to focus on greater self-regulation

• The emphasis is not just on compliance, but increasingly on fostering values-based, ethical cultures in our organizations: the foundation of enduring, great organizations

Source: www.theecoa.org – Executive Director’s Perspective, July 2007


Does Being Ethical Mean You Have To Give Up Profits?

Three approaches to answering this question:

1. Yes, being ethical does mean you have to give up profits

2. No, being ethical does not mean you have to give up being profitable

3. It’s the wrong question to ask! The right question is, “What is the impact on profits if you are unethical?”


1. Being Ethical Does Mean You Have to Give up Profits

Examples:

• Overbilling of hours & expenses

• Our own resignation from a client account

• Cost of an Ethics and Compliance Program


2. Being Ethical Does Not Mean You Have to Give Up Being Profitable

• “Giving up Profits” vs. “Being Profitable”

• Short term vs. long term

• Being ethical has its own intrinsic rewards: honesty pays, being ethical does not cost you profitability


3. The Right Question is, “What is the Impact on Profits if You Are Unethical?”

Sooner or later, you get caught, which can be extremely expensive:

• Enron– During 2001 shares fell from $85 to $0.30

– Over $7 billion in settlements have been awarded in Enron-related law suits

• Andersen– The firm surrendered its licenses and its right to practice, and lost nearly all of its clients when

it was indicted.

– Workforce plummeted from a high of 113,000 to about 200 employees

• WorldCom – The company emerged from Chapter 11 bankruptcy in 2004 with a new name, MCI, and about $5.7

billion in debt and $6 billion in cash. About half of the cash was intended to pay various claims

and settlements

– Previous bondholders were paid 35.7 cents on the dollar. The previous stockholders' stock was valueless

– $6.1 billion in settlements awarded to WorldCom investors


3. The Right Question is, “What is the Impact on Profits if You Are Unethical?”

• Ultimate Cost:– Lawsuits, penalties, fines, judgments– Reputation (individual / corporate)– Customer loss– Ability to attract and retain talent

• Why does unethical behavior exist?


Four Problem-Solving Steps to Address Ethical Dilemmas

1. Identify the dilemma and assess the potential risk to the organization, others and yourself

2. Consider several alternative actions and the potential outcomes and consequences of each action.

3. Decide on the best course of action and implement it.

4. Evaluate the result of your actions

Remember: I can decide to be ethical!


“What If” Scenario: Client Dilemma

The Scenario:• You are an auditor working on a project for an important client for your firm

• The result of your work will have a significant, financial impact on the client and the client has insisted that your final report reflect an outcome that has been pre-determined by their internal staff

• The client believes that they already have the “right” answer, but need your organization’s report for external validation. Moreover, the client has threatened to use a competitor if you/your organization is not cooperative

• You know that there is a certain amount of latitude in the findings with your report, and that by supporting the client’s data, you could solidify the relationship. You decide to support the client’s data



The Impact of the Unethical Behavior and

Decisions Made:

1. What is the potential risk to the organization?

2. What is the potential risk to others?

3. What is the potential risk to you?



Ethics Problem-solving Considerations:

1. What questions should be asked early on in dealing with this dilemma?

2. What internal resources can you use for guidance? Who should be notified?

3. What alternative actions could you take when faced with this dilemma?

4. What are the potential outcomes and consequences of each action?

5. What is the best course of action to follow? How will you implement it?

6. How will you know that you have made the right decision?


“What If” Scenario: Survival

The Scenario:• You are the VP of quality control at a pharmaceutical company

• You have been tasked with getting a new drug out to market

• Recent tests show potential adverse side effects with the new drug. Although the test results are inconclusive, you are concerned

• You are under great pressure to get this product to market, as the company has recently had a drug recall, resulting not only in loss of sales, but also increased costs due to associated litigation

• Company management expresses the importance of launching this product soon, as they believe the company's very survival could be at stake, if this new drug isn’t launched

• What message did you just hear?


“What If” Scenario: Foreign AffairsThe Scenario:• You have been recently promoted to VP of sales & marketing at a telecommunications

company. • Based on your great performance, you have been directed to sell your company’s Voice

Over IP services in a country that has been determined by management to be a key target market for these VOIP services

• You are competing with another VOIP service provider to sell services to the country’s state-owned telecommunications carrier.

• Your local contact in the country has advised you that the key to winning this contract is to make a great impression on the senior officials of the company and that they enjoy driving luxury cars.

• Your company management has told you to “do whatever it takes” to seal this deal and you suspect your competitor is offering a lavish gift to the senior officials.

• You decide that in order to have any hopes of winning the contract you need to purchase the luxury cars for the officials, and you have the cars delivered.


In your opinion, which conversation is the toughest? Why?

Discussion: Potentially Tough Conversations

• Questioning the decisions or actions of a:– Colleague– Boss– Client– Direct report


Discussion: Retaliation

• What is retaliation?– When the conditions of employment change, because someone has

raised an issue through some channel

• What are some examples of retaliation?– A sudden, unexplained change in assignments– An unexpected, poor performance evaluation that seems to contradict

great performance and attitude– A sudden denial for a deserved promotion, for unexplained reasons– Harassment and intimidation– Being ostracized by co-workers


A Few Words about Retaliation…

• Fear of retaliation is one of the biggest barriers to successful communication about ethical concerns

• At the Deloitte U.S. Firms there is no place for retaliation, in fact, there is a strict policy against retaliation

• If one of our people feels someone has retaliated against them for reporting an issue in good faith, then they should consider contacting:– Chief Ethics and Compliance Officer– Integrity Helpline– Human Resources


Final Comments

• Ethical behavior is not:– About laws and compliance– Codes of Conduct, helplines, Compliance Officers

• It is about culture and character– Ethical environment– Moral courage– “Walking the talk”– Leading by example


Q&A


The Ethical Compass in Business Presented at Saint Louis University St. Louis, MO March 26, 2008 Mike Zychinski, Partner Deloitte & Touche LLP.

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