B U S I N E S SB U S I N E S S E T H I C SE T H I C S Managing and Controlling Ethics Program NURUL MARHIAH SITIO, S.AB.,M.M

CHAPTER OBJECTIVES Identify the benefits of ethics auditing Examine the challenges of measuring nonfinancial performance Explore the stages of the ethics auditing process Understand the strategic role of the ethics audit Define ethics auditing

The Ethics Audit Anethics auditis a systematic evaluation of an organization’s ethics program andperformance to determine whether it is effective. A major component of the ethicsprogram described in Chapter 8, the ethics audit includes “regular, complete, and d ocumented measurements of compliance with the company’s published policies and procedures.” As such, the audit provides an opportunity to measure conformity to the firm’s desired ethical standards. An audit can be a precursor to setting up an ethics program, as it identifies the firm’s ethical standards as well as its existing policies and risk areas. Recent legislation and FSGO amendmentsencourage greater ethics auditing as companies attempt to demonstrate to various stakeholders that they are abiding by the law and have established programs to improve ethical decision making. While companies are not required to report the results of their audits to the public, some firms, such as New Belgium Brewing, do report the results of audits in areas such as employment practices, sustainability efforts, and community outreach.

A ss e ss men t of an o r gani z a t ion ’ s e t hical c u l tur e i s nece ss a ry t o imp r o v e e t hical pe r fo r mance and t o doc u men t in legal p r oceeding s t ha t a fi r m ha s an effec t i v e e t hic s p r og r am. Companie s can us e e t hical a u di ts t o de t ec t mi s cond u c t befo r e i t become s a majo r p r oblem, and a u di ts p r o v ide e v idence of a fi r m ’ s a tt emp ts t o iden t if y and deal w i t h majo r e t hical r i s k s A u di t ing can al s o help companie s a ss e ss t he effec t i v ene ss of t hei r p r og r am s and policie s, w hich of t en imp r o v e s t hei r ope r a t ing efficiencie s and r ed u ce s co sts Identify the benefits and limitations of ethics auditing The r e a r e man y r ea s on s w h y companie s choo s e t o anal yz e, r epo rt on, and imp r o v e t hei r e t hical cond u c t.

Human Capital Operational Excellence Global Political Innovation Customer Relationship TOP CHALLENGES FOR CEO ' S

CONTINUE Government Regulation Global Expansion Corporate brand and reputation Sustainability Trust in business

Issues such as trust, sustainability, and customer relationships are among the top ten challenges. These issues can be considered risks associated with managing and controlling ethics programs. Therefore, they represent key areas important in an ethics audit. A growing number of investors are considering nonfinancial measures—such as the existence of ethics programs, legal compliance, board diversity and independence, and other corporate governance issues like CEO compensation—when they analyze the quality of current and potential investments. Research suggests investors may be willing to pay higher prices for the stock of companies they deem accountable,such as stock fromFortune ’s “World’s Most Admired Companies,” including Samsung, Cisco, Berkshire Hathaway, Southwest Airlines, Marriott International, Procter & Gamble, M, Deere, UPS, and BMW, who have generally avoided major ethical disasters

Measuring Nonfinancial Ethical Performance Although much of the regulation of corporate ethics and compliance focuses on financial measures, to truly have integrity, an organization must also focus on nonfinancial areas of performance. The word integrity in this context implies a balanced organization that not only makes ethical financial decisions but also is ethical in the more subjective aspects of its corporate culture. The Sarbanes–Oxley Act focused on questionable accounting and the metrics that destroy shareholder value, but other models have been developed—such as Six Sigma, the Balanced Scorecard, and the triple bottom Line—to capture structural and behavioral organizational ethical performance.

Many considerations are addressed when conducting an audit, such as the depth and width of the audit, application of the standards of performance, the frequency of audits, how the results are reported to stakeholders, and what actions should be taken in response to audit results. Therefore, corporate approaches to ethics audits are as varied as their approaches to ethics programs and their responses to improving social responsibility. An ethics audit should be unique to each company, reflecting its size, industry, corporate culture, and identified risks as well as the regulatory environment in which it operates. Thus, an ethics audit for a bank will differ from one for an automobile manufacturer or a food processor. Each company has different regulatory concerns and unique risks stemming from the nature of its business. T H ET H E A U D I T I N GA U D I T I N G P R O C E S SP R O C E S S

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THETHE STRATEGIC IMPORTANCE OF ETHICS AUDITING Although the concept of auditing implies an official examination of ethical performance, many organizations audit performance informally. Any attempt to verify outcomes and compare them with standards is considered an auditing activity. Many small firms might not use the wordaudit,but they still perform auditing activities. Organizations such as the Better Business Bureau (BBB) provide awards and assessment tools to help any organization evaluate its ethical performance. Companies with fewer resources may wish to use the judging criteria from the BBB’s Torch Award Criteria for Ethical Companies as benchmarks for informal self-audits. Recent winners of this award included Ford Motor Company, Barney & Barney LLC, and Rockwell Automation, Inc. The award criteria even provide a category for companies with less than 10employees. An ethics audit should be conducted regularly rather than in response to problems or questions about a firm’s priorities and conduct. The ethics audit is not a control process to be used during a crisis, although it can pinpoint potential problem areas and generate solutions in a crisis situation.

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