How effective are ethics codes and programs? Many companies craft codes of ethics and establish the related ethics and compliance programs to enforce the codes. But do they actually work in practice to accomplish what they set out to do?

Author:Hopkins, Sheryl L.

If there has been any doubt about the importance of ethics and integrity in conducting business in the United States, that doubt should have been laid to rest by two recent government actions. In November 2012, the Obama administration temporarily blocked BP PLC from entering new contracts with the U.S. government citing BP's "lack of business integrity" in the 2010 Gulf of Mexico oil spill--a significant issue for an oil company operating in the Gulf of Mexico.

And a federal court in the Southern District of New York in 201 2 allowed a shareholder lawsuit against Goldman Sachs & Co. to proceed based on allegations that Goldman Sachs misrepresented to investors that it was an honest and ethical company. In rejecting Goldman's assertion that its statements about its honesty and integrity were simply opinion or puffery, the court stated:

"Goldman's arguments in this respect are Orwellian. Words such as 'honesty,' 'integrity' and 'fair dealing' apparently do not mean what they say; they do not set standards; they are mere shibboleths. If Goldman's claim of 'honesty' and 'integrity' are simply puffery, the world of finance may .be in more trouble than we recognize."

In 1991, corporate America began to develop codes of ethics and related ethics and compliance programs to comply with the newly enacted Federal Sentencing Guidelines for Organizations (FSGO). Most major corporations today have both a published code of ethics and an ethics and compliance program frequently modeled on the FSGO.

But corporate scandals and misconduct continue to make headlines, and there have been many examples of corporate misdeeds in companies that were perceived to have model programs--at least on paper. So do these programs have teeth and are they effective at preventing or detecting misconduct? The answer is not simple and varies from business to business. But the need for continuing efforts to improve and implement effective ethics and compliance programs is self-evident.

Expectations and Requirements

The FSGO are widely recognized in the U.S. as setting out the framework for an effective ethics and compliance program in the private sector. By offering organizations reduced federal sentences in criminal prosecutions for setting up and implementing "effective" programs (among other factors), the FSGO started a movement in corporate America to improve self-policing to prevent wrongdoing.

Although the U.S. Department of Justice (DOJ) investigations of large companies today rarely end up in trials where the FSGO actually come into play in sentencing corporate defendants, FSGO standards for effective ethics and compliance programs have become a principal reference point in setting up and implementing such programs.

The FSGO are principles-based and provide for flexibility in establishing and implementing an ethics and compliance program--there is no one-size-fits-all. However, two overarching principles govern the...

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