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					The Risks and Opportunities Within
Your Ethical Ecosystem

Anthony Miller, Executive Vice President
October 18, 2005




                                           1
Today’s Key Messages

1. ―An Ounce Of Prevention Is Worth A Pound Of Cure‖
         It’s All About The Culture, Silly!
2. ―You Are Only As Strong As Your Weakest Link‖
         The World Is Flat…And Round…And Small… And
3. ―Begin At The Beginning And Go On Till You Come To
   The End; Then Stop‖
         First Things First!
4. ―There Is Light At The End Of The Tunnel‖
         Its A Train Heading Your Way!
5. Both ―The What‖ And ―The How‖ Matter
         Do Ask, Do Tell!
                                                    2
A Loss of Trust

   Business Leaders
   Mutual Funds
   Media
   Religious Leaders
   Academics
   Pundits
   Politicians
   Professions
     – Lawyers
     – Accountants
   Wall Street



                        3
Today’s Complex Regulatory Landscape
                          Regulations Enacted in Response to Exigencies


        1970s                                 1980s                                          1990s
   Watergate (1973 - 1976)              Congress (1985)                                       FDICIA (1991):
Illegal payments (political
                                       Legislation requiring management                 First Legal Requirement
contributions & bribes) to foreign
                                        reporting on internal control                Large banks (assets in excess of
governments
                                                                                      $500 million) to assess and report
                                                                                      on the effectiveness of internal

       SEC (1979)                         Treadway Commission
                                                                                      controls over financial reporting

Proposed requirement for                                                             Evaluation must be based on internal
 management reporting with                       (1987)                               control criteria
 attestation by independent auditors   Recommended management
                                       reporting
                                                                                           Federal Sentencing
                                                                                            Guidelines (1991)
 Cohen Commission (1974)                     SEC (1988)                              An effective internal control or
AICPA recommended management           Proposed requirement for                       compliance program will be
 reporting                              management reporting with limited             considered in determining penalties
Attestation by independent auditor      independent auditor involvement


        Foreign Corrupt
      Practices Act (1977)                           Sarbanes-Oxley Act (2002)
Effective internal controls prevent                         Enhanced role of the Board Audit Committee
 illegal payments                                        CEO/CFO Certification of the Financial Statements
Extensive documentation of internal          Certain limitations on types of compensation for executive management
 accounting controls                                        Code of Ethics for senior financial executives
                                                                                                                            4
Reforms Are Proving Costly
           Large firms have on average spent nearly
            70,000 additional man-hours complying with
            the new law.
              –   Source: The Economist, May 19, 2005
           Cost of Sarbanes-Oxley §404 alone at $5 to $6 billion
            for 2004.
              –   Source: Abigail Gray, ―Coming to Grips with Sarbanes-Oxley,‖
                  September 2005
           Cumulative cost of compliance in first year: $35 billion
              –   Source: American Electronics Association
           ―The loss in total market value around the most
            significant legislative events‖ has reached $1.4 trillion.
              –   Source: ―Economic Consequences of the Sarbanes-Oxley Act of 2002,‖
                  June 2005



                                                                                 5
More Formal Programs, but Increased Risk

On a national level, formal ethics and compliance
training programs are on the rise, but ―positive
outcomes expected of those programs are not‖ including
observed misconduct, reporting behaviors and pressure
to compromise standards:

          – 52 % of employees observed at least one type of
            misconduct in the past year – almost unchanged
            since 1994
          – Only 55% of those who observed misconduct
            reported it to management
          – 10% of employees reported they ―always‖ or
            ―fairly often‖ fell a pressure to compromise
            standards – unchanged from 2003

Source:       1994 - 2005 Ethics Resource Center
              National Business Ethics Survey® October 2005

                                                              6
Beyond Programs to Values
A Booz Allen Hamilton/Aspen                    Exhibit 1: Values Included in Corporate Values
Institute survey of corporate                  Statements (All Respondents)
behavior found ethical behavior                Ethical Behavior/Integrity
is a core component of company                                                                90%

activities:                                    Commitment to customers
                                                                                             88%
     – Of the 89 percent of
                                               Commitment to employees
        companies that have a                                                         78%
        written corporate values               Teamwork and trust
        statement, 90 percent                                                        76%

        specify ethical conduct as             Commitment to shareholders
                                                                                69%
        a principle
                                               Honesty/openness
     – Companies that report                                                    69%
        superior financial results             Accountability

        emphasize values.                                                      68%
                                               Social responsibility/corporate citizenship
    Source: strategy + business, Summer 2005
                                                                             65%

                                                                                               7
Culture – Most Important Factor

Influencing Executives …                                          …But Little Management Focus


Corporate                                     50%
                                                                          88%
Culture



Share Price                      25%




Incentive                       23%
Compensation                                                                           5%



                                                                     Devote Little    Very Effective
                                                                     Attention to     Assessing
Source: Center for Corporate Change – Vail Leadership Institute      Culture Impact   Leaders’
                                                                     on Executives    Ethical
                                                                                      Principles
                                                                                                       8
A Shift from Compliance to Reputation
 What are the key benefits of first-rate compliance, in your view?

 The firm avoids damage to its reputation stemming
 from non-compliance                                                                    82%

 The firm avoids financial and other penalties stemming
 from non-compliance                                                                    53%

 The firm’s overall strategy is less susceptible to
 operational risk                                                                       39%

 The firm is likelier to be responding to the wishes and
 needs of the customers                                                                 23%

 The firm has access to better management information                                    7%

PWC/EIU Survey of 180 Senior Executives: Compliance: A Gap at the Heart of Risk Management:
PWC/EIU 7th Annual CEO Survey of 1400 Global CEO’s

                                                                                              9
Your Reputation Extends Beyond Your Walls




                                        10
External Assaults Can Have a Profound Impact
 Life Sciences Research, the parent company
  of Huntingdon Life Sciences, forced to
  relocate to New Jersey from the UK after
  years of attacks from animal rights activists.
 The company was initially resolute in
  continuing operations in the UK until the
  attacks spread from the company itself to
  financial institutions that had even tangential
  business relationships with the company
 Shares of the company were set to begin
  trading on September 7th on the NYSE where
  CEO Brian Cass was on hand to ring the
  opening bell. Without explanation, the
  Exchange pulled the listing minutes before
  trading opened.


                                                    11
What is an Ethical Ecosystem?

    A system of dynamic and evolving
     components that does not end at the
     company’s walls and employee base
    Not limited to traditional “supply chain”
     partners as core business functions are now
     outsourced
    A community of interactive businesses,
     organizations & individuals that share
     common values and principled standards;
    A cohesive system to maintain integrity
     despite external forces and stresses
                                                   12
Interdependent and Interwoven
                              Non-Product Procurement
 Customers                     Vended HR Services
                               Vended IT Services


             Joint Ventures



                              Employees
 Product Procurement           Quasi-employees
  e.g. turbines, engines      Sales Agents/VARS
   components                  Temporary Employees
                               Contract Employees
                                                        13
Growing Global Complexities

 Evidence of rising consensus on best
  governance, risk and compliance
  practices.
 Europe shares many of the same
  opinions as the US.
    – Turnbull Guidance in the UK
    – 8th EU Business Directive
 Call for greater transparency in business
  dealings in Japan: from relationship to
  results-based.
    – 24% of listed shares on Nikkei owned by
      foreigners.

                                                14
Rising Ecosystem Complexities and Risks

   73% of North American companies outsource at
    least some of their IT functions, as do 66% of
    companies in other nations.
    Source: ITtoolbox 2004 Annual Survey

   74% of companies using offshore outsourcing
    are sending work to India.
    Source: ITtoolbox 2004 Annual Survey

   76% of large (revenues > $1Billion) North
    American and European companies currently
    outsource some HR functions. Source: Conference Board ―HR
    Outsourcing: Benefits, Challenges and Trends Study‖ 2004

   90% of companies surveyed outsource some R
    & D work, with a focus on new product
    development.
    Source: Goldense Group ―Product Development Metric Survey‖ 2002


                                                                      15
Betting Big on the Outsourced Ecosystem

 DuPont is preparing to sign a $1.9
  billion, seven-year extension until 2014
  with CSC to continue outsourcing its
  worldwide IT infrastructure
 DuPont CIO Robert Ridout said that
  outsourcing all IT infrastructure
  functions to a single vendor helps in
  ―streamlining our global business
  operations.‖
   Source: OutsourcingPipeline.com, July 2005




                                                16
                                        ?
Evolving Rapidly
“Enron is moving so fast that
sometimes others have trouble
defining us. But we know who we
are. . . .”
      - Enron Annual Report, 1999




                                    ?
                                        Jury selection for
                                        the trials of
                                        Kenneth Lay and
                                        Jeffrey Skilling
                                        begins January
                                        17, 2006




                                                  17
       High
                                                                       Gold
                                                                        Std
Impact on Shareholder Value

                                                            Amongst      Long Term
                                                              Best

                                          Not Among
                                                                         Short Term
                                            Worst


                               Legal
                              Minimum



               Low

                              Low
                                        Ethical Standards Investment      High   18
A Confounding Lack of Support and Consensus

 Almost 50% of companies
  reported that there wasn’t a
  clear understanding of
  management and others within
  the company of what legal risks
  are acceptable to Board
 Almost 1/3 companies reported
  that it is very or extremely
  difficult to get board and senior
  management support for
  compliance programs
                                        19
A Failure to Systematically Mitigate Risk

 Almost 1/3 of companies rated in
  very or extremely difficult to
  prioritize risk and determine where
  to dedicate resources.
 Despite growth in ERM as a
  function, while 80% of Financial
  Services companies had a Chief
  Risk Officer in 2004, less than 1/3
  had integrated risk assessment
  across any key dimension – risk
  type, business unit, geography

                                            20
   Optimal Risk Threshold
                   H

                           Potential For Cost
                                                     Avoid or
                               Manage
                                                     Eliminate
(Probability X Cost)



                           Opportunistically
 Expected Impact




                                                Potential For Crisis
                             Address Later           Manage
                                                   Proactively


                   L
                       L                                               H
                                “Guilt By Association” Risk                21
Lessons from the Safety and Quality
Movements
Safety
Large manufacturing companies, public utilities,
railroads, steamship lines, and insurance companies
were particularly concerned with reducing the number
of injuries and deaths as well as with cutting the cost of
workmen's compensation, other damage payments, and
litigation arising out of accidents.

Quality
Six Sigma embeds quality thinking — process thinking
— across every level and in every operation, rather
than as a back-end control mechanism




                                                             22
       A Sustainable Business Process
                                                         Prevent Potential
 Define Ethics                                           Breaches
 Compliance and Culture
 Expectations

                                     PREVENT


                                                           Detect Issues Early before
                          DEFINE                           they Become Widespread




                                               DETECT
Evaluate Program
Effectiveness


                          EVALUATE

                                                        Respond to Issues Promptly
                                                        and Effectively
                                     RESPOND



                                                                              23
DEFINE


                    Risk Assessment



         Vendor                       Resources
          Profile


                        Policies




                                                  24
PREVENT


                     Communication



          Guidance                   Incentives



                       Education




                                                  25
DETECT

                            Certification



         Predictive Model                   Whistleblower



                            Coordinated
                            Data Access




                                                            26
RESPOND


                       Process


          Corrective
                                  Systems
           Action



                       Analysis




                                            27
EVALUATE

                    Internal
                   Quantitative


       Business                    Internal
       Strategy                   Qualitative


                    External
                  Benchmarking




                                                28
     Program Scope Evolving and Expanding
                                                             Prevent:
  Define:                                                     Program Design
   Data-driven Risk                                            Support
    Assessment                                                Expanded Education &
   Risk Profiling By                                           Communication
                                         PREVENT                Program
    Supplier Type


                                                               Detect:
                              DEFINE
                                                                Regular Reporting/
                                                                 Monitoring
                                                                Proactive Compliance
                                                                 Audits
                                                   DETECT
Evaluate:
 Clearly Defined Metrics
   and Benchmarks
 Ethical Health Assessment
                              EVALUATE

                                                            Respond:
                                                             Crisis Response Programs
                                         RESPOND
                                                             More Integrated Processes &
                                                              Controls


                                                                                   29
Ecosystem is Fragmented and Global

Wal-Mart code of conduct rejected by
German court for provisions relating to:
    – Employee personal lives
    – Alcohol and drug use
    – Requirement to report violations to
      an ethics hotline.


Plenary of the French Data Protection
Authority refused to authorize
anonymous whistleblower hotlines
operated by McDonalds France



                                            30
A 45 Year Commitment to the Ethical Ecosystem

 Article XIX of the Bylaws, this Code of
 Ethics establishes for the member a
 foundation of professional conduct.
 However, ethical conduct may require
 more than merely abiding by the letter
 of the code. It is therefore incumbent
 upon each member of the association
 to make a commitment to honorable
 behavior in all aspects of work and
 professional activity.
          -- NCMA Code of Ethics



                                           31
Recognizing the Importance of the Ecosystem

 ―DII’s essential purpose is to combine the common
  dedication of its Signatories to a culture and practice
  of ethics . . . .‖
 ―Signatories are united in the commitment to adopt
  and implement principles of business ethics and
  conduct . . . Further, they each accept the
  responsibility to create an organizational culture in
  which ethics is paramount, and compliance with
  federal procurement laws is a strict obligation.‖
 ―The DII’s essential strength lies in sharing best
  practices to maintain the highest ethical standards,
  encouraging employees to ethical conduct, and
  requiring compliance in the course of its business
  activities.‖

                                                            32
Integrity for All Ecosystem Stakeholders

―[T]he working group and SMC's [Supplier
Management Council] Executive Committee
will consider a means to share training
materials among member companies and
address whether having a written code of
business ethics and conduct should be a
requirement for associate membership as it
is for regular AIA companies.‖

-- Bob Sprole, Chairman, SMC Supplier Code of Ethics Working Group
President and CEO of Therm, Inc., May 2005




                                                                     33
A Call For Higher Standards: OCEG
The Open Compliance and Ethics Group
The OCEG Framework enhances organizational         PLAN
value by providing universal guidelines for
integrated compliance and ethics programs that:
    – enhance the integrity and ethical culture
      of an organization
                                                  CULTURE
    – incorporate effective governance,
      compliance, risk management, and
      integrity into all business practices
    – measure effectiveness and performance
      both internally and against an objective,
      external benchmark




                                                            34
The Risk of Success or Failure




                                  RISK
       Expectations    Scrutiny
                        of the
                        ―How‖



       Performance

                                         35
The Essential Dilemma: Comply but Deliver
―We must consider ethical conduct at every
decision point in our business, and think
through the reputation risks of projects and
deals just as we weigh capital and other
risks. Principled, ethical conduct must
supercede economic expedience . . . Ethical
dilemmas are hard to spot at times – like
the snake in the grass you don’t notice until
you’ve been bitten. . . . In the courts of law
and public opinion, we don’t have the
benefit of hindsight.‖
    - CEO Rick Priory, ―Rebuilding Trust in Corporate America‖ 2002




                                                                      36
The Imperative: An Ethical Ecosystem

Global businesses must navigate:
   – New regulations
   – Global environment
   – Faster moving world
   – Greater risk of non-compliance,
     monetary fines, criminal penalties,
     for executives
   – Not every eventuality can be
     anticipated




                                           37
The Risks and Opportunities Within Your Ethical
Ecosystem

Anthony Miller, Executive Vice President
October 18, 2005




                                                  38

				
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