In the very early stages of the twenty-first century corporate accounting scandals were the hot topic, it almost seemed that a new controversy surfaced every day. One result of all this was the passage of the Sarbanes-Oxley Act, which was signed into law in July 2002. The law sought to address many of the ethical and accounting practices that led to the scandals, including such issues as off-the books-debt, improper compensation and loans to executives. A second reaction to the scandal has been a move by corporations to create an ethical culture in their business. This drive has resulted in various programs and training courses, all targeted at emphasizing the importance of ethics. Some examples include issuance of a guide to ethical conduct, establishing an ethics department and/or requiring employees to annually sign an agreement to abide by ethical standards. All of these initiatives appear to be well intentioned, and there have been some positive results, but there is a lot of room for improvement. Companies continue to discover employee fraud and last year brought the banking meltdown, something many would argue would not have happened if the banking officials were acting ethically. Situations like this make it apparent that the efforts to date have not completely solved the problem of ethics in business. An examination of problems with both the law and corporate programs will reveal some potential improvements that could lead to greater results and benefit the entire value chain.

Before it was even signed into law the Sarbanes-Oxley Act was being denounced for its lack of explicit requirements. ‘The Act, which sets only the highest level and most general of requirements but imposes the possibility of substantial penalties for not complying with them, was immediately criticized by corporate America as being overbroad and vague.” (Montana, 2007) It was expected that regulators, such as the SEC, would elaborate on the law and provide guidance on how businesses could best comply. So far that has not happened, at least not to the satisfaction of most business executives, as a result companies have spent millions, possibly even billions, on detailed record keeping programs in order to avoid potential fines. With better guidance from the government many of the resources could have been better directed to the benefit of all of the stakeholders. One possible reason for the lack of regulatory clarification is the scarcity of resources. SOX did provide additional funding for the SEC but much of it was held up by budget constraints. (Prentice, 2005) Ensuing events such as the Iraq war, the 2008 presidential election, and backdating of stock options have also taken the attention of Congress, causing the problems with SOX to be left on the back burner. Another issue with the regulators revolves around the provisions for protection from retaliation under SOX section 806. As of August 2007 nearly 1000 petitions had been filed under 806 but all had ultimately resulted in a decision that favored the business. (Verschoor, 2007) Without real protection from retaliation employees will be very reluctant to disclose unethical behavior. Perhaps the largest issue with the law is that it is an attempt to legislate personal moral issues. While practically all laws are legal declarations of right and wrong, some issues are easier to codify than others. Almost everyone would agree that murder is wrong, except in very specific circumstances. The same is not true for such things as honesty and integrity, there are many more ideas of what these terms mean and how a person displays them, yet is these types of moral issues that SOX attempts to put into law. Attempting to legislate concepts that are so personal makes the law difficult to implement and hard to enforce. When compiled, the challenges with putting personal morality into law, restricted funding, and lack of clarification on how to comply with the law, add up to substantial problems for SOX.

The issues are not all with the law; many of them lie in the business’s implementation of their ethics programs. In his article, “Baking Ethics into Company Culture,” Christopher Bauer provides an excellent analysis of why many ethics initiatives fail and lists several mistakes that companies make when attempting to create an ethical culture. These mistakes include doing nothing more than issuing an ethics code and confusing ethics with a code of conduct, compliance or corporate social responsibility. Other mistakes include only seeking input from senior management, thinking that creating an ethics department solves everything, and believing they cannot afford an ethics program. (Bauer, 2009) When executives issue an ethics program but fail to follow through with training and reinforcement it quickly becomes apparent to employees that it is just another flavor of the month and therefore has little impact on the way their perform their jobs. A code of conduct is just what the name implies, a set of guidelines for acceptable behavior at work, but ethics are a set of principles that can be applied when there are no specific rules relevant to the situation. (Bauer, 2009) In his article Bauer explains the difference between compliance and ethics. “Though it is an imperfect distinction, consider the compliance programs as safeguarding a company’s rules while an ethics program promulgates and safeguards the company’s values.” (Bauer, 2009) While corporate social responsibility is great, it is directed externally and does not necessarily reflect the true values of the business or its employees. Failure to obtain input from all levels of employees can cause any program to fail, ethics is no different, to get buy in from the front line their thoughts and opinions must be considered. The idea that creating an ethics department will solve all ethical issues is a great example of management’s disconnect from the real problem. If management does not actively participate in promoting and modeling ethics then there can be no realistic expectation that an ethical culture will develop. It is no more effective than a parent telling their child “do as I say, not as I do.” There is substantial evidence that ethical companies are more successful than others, yet some business leaders continue to say that they cannot afford an ethics program. In the “…Report to the Nation on Occupational Fraud and Abuse, issued by the Association of Certified Fraud Examiners, found an average loss of 7 percent from fraud and abuse in the companies sampled.” (Bauer, 2009) That savings alone should make it evident that investing in ethics has a great return. Failing to consider the savings and increased profits that an ethical culture generates is a major mistake. Many companies that have decided to try to develop a more ethical culture have made mistakes such as those discussed above that either result in the appointment of a figurehead, creation of an “in-name-only” program or substitution of another program under the name of ethics.

Errors like these obviously reduce the effectiveness of any ethics initiative, several steps can be taken to avoid these errors or repair the damage if they have already been committed. In business, all things cultural start at the top, if the business leaders truly desire an ethical culture, they must be involved. This includes doing more than rolling out the red carpet to welcome a new Director of Ethic or sending out an enterprise wide announcement of a new emphasis on ethics. Employees must know that executives are abiding by the same principles they are asked to follow, providing them with examples of ethical dilemmas that their executives have faced is a great way to allow employees to see this and at the same time build a sense of teamwork. If an ethics department is established senior management must make it a point to offer public support for the department and those working there. Simple things such as including the director in employee meetings and spotlighting them in the company newsletter can go a long way towards assuring associates that the new department has the full backing of senior management. Executives must also assure that any initiative is truly an ethics program and not a code of conduct or compliance program. They must take the time to understand the differences and assure that each fills its role in the business.

What may be equally as important as the tone at the top is the involvement of middle management; these are the managers that have regular interactions with front line associates. When The Bank of New York Mellon realized this element was missing in their “Doing What is Right” program they created a program titled “Communicating Managers” which sought to provide them the tools, techniques and information they can use to engage employees is ethics. (Guenther and Davis, 2009) Just as associates want to be sure that executives are behaving ethically, they want to know the same thing about their managers, so managers should make it a point to discuss this with their employees. This will not only assure the team members know that everyone is expected to follow the same guidelines but at this level they can also begin to make associations with decisions they make and apply the principles to their own performance.

In addition to discussing personal examples of ethical decisions, managers must also provide employees with training that includes relevant, real life examples that the employees may face in their jobs. Associates need many opportunities to practice making ethical decisions, this can be accomplished through computer based training modules, role plays, and even educational games. Utilizing multiple methods not only accommodates various learning styles but the repetition of practice helps to cement the desired behaviors. As a part of the training, businesses need to provide clear definitions of ethical terms, employees must understand exactly what terms like “integrity” and “diversity” means to their company. They need to know what behaviors are viewed as ethical and which ones may be considered marginal. As mentioned earlier, this can vary from person to person so it is extremely important that the business leaders spell it out as concretely as possible. The less that is left to interpretation, the more employees will be comfortable with the ethics policy and the more likely they are to comply.

By providing company relevant definitions business leaders would address one of the areas where they face some of their biggest ethics related challenges, the deficiencies in the law. Businesses can also attempt to assure that there is no retaliation against whistle blowers, but until the government’s actions back this up employees will be reluctant to disclose ethics violations, particularly when there is little or no possibility of remaining anonymous. Other problems with the law, vague requirements and insufficient financial support for regulatory agencies, are even more difficult for a company to address head on, instead they will have to pursue solutions through legislative and regulatory bodies. To some this would seem counterproductive, but when the amount of money businesses have spent on compliance efforts is considered, it becomes apparent that it would be in their best interest to seek a final clarification of legal expectations.

Seeking resolution to compliance questions is only one step that a company can take to improve on the issues caused by the deficiencies in the SOX law. They can also do everything possible to prevent retaliation and provide clear definitions of ethical terms that are relevant to the company’s values. By providing training that includes both clear definitions and relevant examples and also providing employees with opportunities to practice ethical decision-making, companies can avoid some of the common mistakes of ethical programs. Other mistakes can be avoided by assuring that managers speak to their employees about ethical issues and making sure they have the information and tools they need to feel comfortable doing so. Managers, of course, follow the example set by company executives so it is essential that the tone at the top reinforces the importance of ethical behavior and that everyone in the company knows that even the executives are following the same principles. Enacting these concepts will allow businesses to avoid mistakes that inhibit the development of an ethical culture and also allow them to reap the benefits of an ethical environment.

References

Bauer, C., (2009). Baking Ethics into Company Culture. Financial Executive, 25(4), 18-21.

Guenther, J. and Davis, A. (2009). Doing What’s Right at Work: How to help managers engage employees in ethics. Public Relations Tactics, 16(9), 20.

Montana, J. (2007). The Sarbanes-Oxley Act: Five Years Later. Information Management Journal, 41(6), 48-53.

Prentice, R. (2005). The Student Guide to the Sarbanes-Oxley Act. Mason, Ohio Thomson Publishing.

Verschoor, C. (2007). Ethical Culture More Important than Ever. Strategic Finance, 89(2), 11-21.