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Integrity-Based Financial Leadership and Ethical Behavior Frederick C. Militello, Jr. Michael D. Schwalberg Ph.D. Fina...

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Integrity-Based Financial Leadership and Ethical Behavior

Frederick C. Militello, Jr. Michael D. Schwalberg Ph.D.

Financial Executives Research Foundation

Integrity-Based Financial Leadership and Ethical Behavior A Professional Response to Meeting the Challenges and Responsibilities

Frederick C. Militello, Jr. Senior Partner, FinQuest Partners LLC Michael D. Schwalberg Ph.D. Senior Partner, Hudson Valley Psychology Associates, PLLC

A publication of Financial Executives Research Foundation, Inc.

ADVISORY COMMITTEE Raj Aggarwal Firestone Chair in Finance/Business, Graduate School of Management, Kent State University Arthur N. Alderson Vice President Finance and Administration, Cox Business Services, Cox Communications Marla Markowitz Bace Executive Vice President and Chief Operating Officer, Financial Executives Research Foundation, Inc. George Boyadjis Executive Vice President, Chief Financial Officer and Treasurer, American TeleCare, Inc. Ridge A. Braunschweig Executive Vice President and Chief Financial Officer, Orion Corporation James N. Clark Board of Directors, Secretary Executive Vice President and CFO (Ret.), The Western & Southern Life Insurance Company Nicholas S. Cyprus Vice President and Controller, AT&T Walter Deriso, Jr. Vice Chairman of the Board, Synovus Gary L. Ellis Vice President and Corporate Controller &Treasurer, Medtronic, Inc. Frank R. Gatti Senior Vice President, Finance, Operations, Administration and Chief Financial Officer Educational Testing Service Cheryl de Mesa Graziano Director of Research, Financial Executives Research Foundation, Inc. Arnold Hanish Executive Director, Finance and Chief Accounting Officer, Eli Lilly & Company Paul Huck Vice President, Corporate Controller, Air Products and Chemicals, Inc. Marsha L. Hunt Assistant Controller and Director of Accounting, Corning, Inc. Joan E. Netzel Vice President, Audit Services, SunTrust Banks, Inc. Stanley C. Smith Vice President, Finance, Mechanical Equipment Co., Inc.

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Financial Executives Research Foundation, Inc.

Table of Contents Purpose and Executive Summary

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Culture and Ethical Behavior

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Competencies Related to Ethics

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The Pressures on Ethical Conduct

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External Regulation versus Internal Organizational Responses

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Organizational Support for Ethical Behavior

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Facing Ethical Dilemmas

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Conclusion

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FEATURED CASE STUDIES Medtronic – Building Integrity into Financial and Business Decision-Making Synovus – Practicing Leadership Expectations

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Appendix – Reading Corner

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About the Authors and Financial Executives Research Foundation, Inc.

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Executive Report

January 2003

Integrity-Based Financial Leadership and Ethical Behavior A Professional Response to Meeting the Challenges and Responsibilities

Purpose In this report, a variety of financial executives, drawn from public, private and not-for-profit companies, share thoughts, insights, and practices that relate to the crisis of financial integrity. Specifically, they were interviewed by the researchers regarding: (1) the pressures financial executives face in fulfilling responsibilities of leadership and ethical behavior; (2) the organizational practices and competencies that relate to the effective handling of such pressures; and (3) a needs analysis of the tools that would best demonstrate financial leadership and promote integrity-based behavior.

“For too long we have allowed institutions to focus inward, without regard for the effect of their actions on those they were duty-bound to serve. We allowed them to trade on the trust we placed in them by accepting a model of self-policing whose currency was not in accountability but in assurances. Those assurances were too often hollow, and that currency has now been substantially devalued.” Attorney General Eliot Spitzer, “The Crisis of Accountability,” Law Day Remarks “Rarely do the character flaws of a lone actor fully explain corporate misconduct” Lynne Sharp Paine, Harvard Business Review “This is a financial community problem. It can’t be solved by a government mandate: it demands a financial community response…Therefore I am calling for…nothing less than a fundamental cultural change on the part of corporate management as well as the whole financial community.” Former SEC Chairman Arthur Levitt

Executive Summary The past year’s crisis of financial integrity has been met with a flurry of laws and regulations designed to restore public confidence in corporations. Likewise, many financial institutions and some corporations seem to be trying to outdo one another in announcing new policies that demonstrate their commitment to integrity and ethical behavior. Yet the vast majority of corporations and financial executives are not unnerved by this situation. Instead they express their strong, if not passionate, belief that ethical behavior and financial integrity remain the rule of the day. Rather than believing that investor confidence can be restored by external regulation, they see the importance of staying the course and walking-the-walk as both the ethical gate keepers and consciences of their organizations.

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As this report demonstrates, the companies where the most serious financial lapses occurred lacked a senior financial executive who performed as both an ethical gatekeeper and a strategic business partner. While most of the executives who were interviewed for this study believe that the ethical lapses were exceptions and hardly normal behavior, their experiences demonstrate that the risk of a repeat of 2002's crisis in financial integrity can be minimized if more companies foster a business climate where financial executives put equal emphasis on both roles. Just a few years ago, such an argument might have seemed at odds with the Enlightened Self Interest model of capitalism with which most financial executives are familiar. But a transition away from the traditional model of capitalism toward what has been termed a Covenantal Ethic (which will be explained in more detail in the next section) need not hinder a corporation's or non-profit organization's ability to reach its business goals. In fact, the financial executive who functions as an ethical gatekeeper and adheres to this Covenantal Ethic is essentially fulfilling his fiduciary obligation to the company's shareholders. But as this report makes clear, this new ethic of capitalism is designed to serve the interests of several parties, not just the owners of a company's stock. These parties, or stakeholders, include employees, customers, business partners and the members of the community or communities in which the company is based. This report also explores many questions around the role of finance in influencing and shaping the ways ethical behavior is practiced at corporations. It demonstrates how financial practices are influenced by a variety of external and internal forces that may bring out either the best or worst in financial executives in a wide variety of business circumstances. In this study, a variety of financial executives, drawn from publicly traded, privately held and not-for-profit companies, share their thoughts, insights, and practices that relate to the crisis of financial integrity. Specifically, the researchers interviewed them regarding: (1) the pressures financial executives face in fulfilling their responsibilities of financial leadership and ethical behavior; (2) the organizational practices and competencies that most relate to the effective handling of such pressures; and (3) a needs analysis of what organizations feel would be most helpful to have (in terms of competencies and tools) as they move forward with their quest for assuring demonstrated financial leadership and integrity-based behavior. Among the specific questions for which we sought answers with our interviewees were: 1. What pressures account for the crisis we are experiencing today in financial integrity? 2. Is there, in your opinion, really a crisis of financial integrity or just a perception of such created by the media? 3. How do the pressures you noted specifically manifest themselves as challenges to ethical financial behavior and financial leadership? 4. Specifically, what are some examples of these ethical dilemmas that you face as a financial executive? 5. To what degree do you perceive these pressures (and the ethical dilemmas they create) to be within, or outside, the control of your own organization?


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6. Citing specific situations, to what degree do you believe these pressures (and the ethical dilemmas they create) can be influenced – positively or negatively – by the behavior of financial executives? 7. How do financial executives create, intervene in or resolve ethical dilemmas at your organization? Cite some specific examples. 8. In thinking about these situations, what competencies do you believe are most critical to the success of financial executives in demonstrating financial leadership? 9. How are these competencies developed and nurtured within your organization, and are they done so with the specific objectives of ethical behavior and financial integrity in mind? 10. Besides developing the relevant competencies of your financial executives, what other organizational initiatives are critical to demonstrated financial integrity and ethical behavior? 11. If you had a wish list of things that could help you promote greater financial integrity and ethical behavior at your company what would it include? 12. In expanding the reach of that wish list, how might it be expanded/modified to include relationships with outside parties, e.g., bankers, auditors, investment analysts, etc? 13. If your company was to initiate financial integrity training at your organization who should it be focused on and what should be its main subject/content focus? This report reviews some of our findings in these areas, and offers a summary and analysis of the most important themes relevant to the practices and actions taken by financial executives in promoting financial integrity and ethical behavior at their organizations.

Culture and Ethical Behavior The financial executives interviewed in the course of researching this report emphasized the integral place that a corporate culture has in supporting ethical behavior and integrity-based leadership. A number of related themes emerged from these interviews that were related to promoting ethically sound behavior in financial professionals. Setting the tone Almost every executive interviewed for this report noted the importance of setting the tone at the top. Stan Smith is Vice President, Finance of Mechanical Equipment, a $30-million-per-year privately owned company. He has been with the company for 15 years. Smith says it is crucial that companies build a corporate culture that stresses ethics and integrity from the hiring process on. Smith advises companies to “put integrity issues in the [employee] handbook” and to clearly articulate, “what is expected and not expected,” at every level of the organization. But most importantly, says Smith, integrity and ethical behavior among leaders must be made highly visible to all members of the company. “We must lead by example.” Ridge Braunschweig is the Chief Financial Officer (CFO) of Orion, a privately held manufacturing company with over 500 employees. He states that there is a recipe for success marked by a strong set of values. Some characteristics of this recipe include integrity, consistency, reasonableness, ethical conduct and a penchant for avoiding 6


mistakes. He noted that he is fortunate enough to work for a company whose owner, chairman and CEO “lives by and emulates these characteristics to the management team and ensures they live by the same recipe. He both articulates and demonstrates them.” Paul Huck, the Vice President, Corporate Controller, of Air Products and Chemicals, Inc., says, “You need a culture which deals well with pressures and problems. One that is seen as fair, open and honest. Integrity has been written down here as one of our core values. We talk about it openly. It is part of our brand. People expect it.” Huck believes that overall, integrity is rewarded and that the employees who demonstrate integrity ultimately succeed at Air Products. Huck says that transmitting the importance of ethical behavior involves being a highly visible role model, and he takes every opportunity to demonstrate integrity-based decision-making and behavior. One recent example of this involved accruals for bonuses. The accruals were just below the line for a higher bonus level. Certain judgments would have put them over the line, but being intellectually honest meant staying under that line in spite of the financial consequences. Huck asserts that the culture of the organization, the character of its people, and the integrity actively demonstrated by its leaders facilitate ethical behavior at all levels of finance. “I am cognizant that the controllers are watching me. If [financial leaders] don’t act with integrity or model ethical behavior you won’t get that type of culture. It’s incumbent upon us to lead here. To communicate our expectations of how executives should act – how we want the organization to be viewed.” Marsha Hunt, Assistant Controller and Director of Accounting of Corning, describes the importance of culture and ethical behavior in the following way. Specifically she notes, “We have a value model at Corning that has been long-standing. Integrity has always been important – integrity is the bottom line and worldwide communication periodically emphasizes that. The behavior that I have seen is that people at Corning don’t get in trouble because bad news happens but because they don’t disclose the bad news fast enough. At Corning, there is a great deal of communication about integrity, and we have a very active communications department that spends a lot of time with local media.” Art Alderson, VP Finance and Administration, at Cox Communications, stressed that while the bottom-line is important at his firm, it is not the singular focus. Employees, customers and family are equally valued. He recounted, with some dismay, hearing the CEO of a major corporation say, not so jokingly, that if a family interferes with one’s contribution to the company, one should get rid of them. “If a company doesn’t value families, it makes a strong statement about its ethics.” Sixty percent of Cox Communications is family owned. Perhaps this contributes to such a strong, values-based culture. Alderson applauds the environment at his organization. “[The culture] is based on ethics and integrity rather than scrutiny and internal controls. It is an environment that encourages collaboration, integrity, ethics and trust. Furthermore, many executives wear two ethical hats, one for business ethics and one for personal ethics. This culture encourages alignment between the goals of maximizing shareholder value and living by the golden rule. It does not view the two as mutually exclusive.


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Study Observation Clearly demonstrated ethical leadership inspires ethical behavior. The tone is set at the top and reverberates throughout the organization. Responsibility to Stakeholders Versus Shareholders The concept of corporate responsibility to a broad set of stakeholders as opposed to a more narrow focus on shareholder value emerges as a central theme in our study. Consider the short-term pressure to make the numbers, which was cited by several of the executives interviewed for this study. Often, an integral part of this focus is the assumption that shareholder value is the be-all and end-all of corporate goals and values. In her book, Good Intentions Aside: A Manager’s Guide to Resolving Ethical Problems, Laura Nash, a noted expert in the field of ethics, advocates the adoption of a moral model of capitalism. She calls this model the “Covenantal Ethic”. This model is juxtaposed to the “Enlightened Self-interest” model that has been the predominant one for American business. The latter model has evolved into one that emphasizes that the primary purpose of business is to maximize one’s interests through maximizing profits. If business acts to further its own interests within the bounds of law and custom, this will result in the greatest good to the greatest number. The Covenantal Ethic model, on the other hand, hearkens back to the covenants of the early Colonial settlements in New England. States Nash, “The term Covenantal Ethic reflects the idea that capitalism is at heart a voluntary social contract between the public and business to fulfil certain mutually beneficial obligations. Briefly stated, it understands the chief goal of business to be the creation and deliverance of value to a voluntary or democratically controlled marketplace. Concomitantly, it is the obligation of the marketplace (via buyers and the law) to see to it that business receives a fair return for such provision of value. Thus, profit becomes the result of other, first, conditions rather than the first condition of business, and efficiency is a subset rather than driving definition of delivered value.” This model emphasizes individual and group relationships over profit. As Nash notes, “Whereas the self-interest ethic focuses on profit as the first purpose and other-oriented values as a secondary contractual condition, the covenantal approach has as its first purpose the welfare of others, and views profits as a secondary contractual condition.” Nash holds that this model, which naturally emphasizes corporate responsibility to a broad array of stakeholders, provides for a strong moral model. While those interviewed did not explicitly use the term Covenantal Ethic, it appears that many of them would agree with its tenets. Again, such thinking and beliefs were most strongly held and articulated by privately held and not-for profit organizations; however, they were not absent from those represent publicly traded companies. Given the growing movement of corporate social responsibility, the pressures placed upon corporations by traditional investors and by the rapidly growing number of non-governmental organizations (NGOs) this trend toward a wider covenantal model may grow in importance, influence and its direct impact on all aspects of ethical behavior. The case studies at the end of this report note one publicly traded company and one privately held business that appear to be successfully embracing this broader covenantal model. For example, Walter (Sonny) Deriso, Jr., Vice Chairman of the Board for Synovus says his firm added “Our Customer Covenant” to other formal documents and tools it uses to 8


communicate values to customers and team members. This societal covenant has been demonstrated by Synovus throughout its 115-year history. The company is proud that following the stock market crash in 1929, it did not lay-off a single employee. This societal covenant, practiced by public companies, is expressed in many other ways as well. Hunt says the values of Corning are professed by all members of senior management, including the CEO, who is a member of the founding family. The slogan in the finance function is “integrity is the bottom line.” States Hunt, “Corning is a company town.” The town is powerfully impacted by the company’s performance. Thus, there is a broad sense of moral responsibility to the community. In fact Hunt noted, “The community is also our shareholder.” One of the company’s core values, says Hunt, “Is to be a good corporate citizen in the communities in which we operate.” Hunt notes, “Because we are large part of the community in upstate New York, we realize that we have to communicate in a straightforward way and a simple way, and we have to take time to make sure people understand [this]. It’s in our interest and the community’s interest that they get it right. We always emphasize communications – in part because of the company culture, and in part because we are in a company town, and it’s so important for us to be a leader of the community. This is simply part of our ethical responsibility, and it’s ingrained in all aspects of our business, especially finance.” And, most importantly, Corning walks the walk. For example, as hard hit as Corning has been by the current economic downturn, particularly in the fiber optics sector, the organization has not fallen to market pressures to report or behave in an unethical manner. “Good communications means timeliness, honesty and accuracy – both the good news and the bad – but timeliness is perhaps the most important in terms of one’s ethical responsibility,” Hunt says, “Quite frankly, if you think about our responsibility in this community, there are real estate agents, school districts and a good many members of the community that are going to go up and down with the company, and we have an ethical responsibility to give them as much notice as we can.” Another example of this phenomenon can be seen at Educational Testing Services (ETS), which, by the nature of its products and services, is very stakeholder-oriented. In fact, according to CFO, Frank Gatti, “Society is really our stakeholder.” The integrity of financial executives has more than just financial implications, notes Gatti. Any perception of a compromise of integrity in finance may brandish the entire organization. The smaller private companies, too, take note of the importance of having a more relationship-based, long-term, stakeholder approach to business, in fostering integrity and ethical behavior. In fact, George Boyadjis, Executive Vice President, CFO, and Treasurer of American TeleCare, Inc., notes that given American TeleCare’s start-up status, there tends to be a more long-term value-creation perspective. The dynamics at companies of smaller size typically result in more personal relationships between a company and its shareholders. For example, at Orion, Braunschweig notes, “Stakeholders are closer, and have a more open and direct channel of communication to financial and operational information.” Smith, of Mechanical Equipment also emphasizes the importance of nurturing long-term relationships through honesty and integrity. Finally, a challenge noted by some of the executives, is to insure that the organization walks the walk of its values. The tone set at the top, the metrics employed and the communication and reward processes and tools used are all critical in facilitating a culture supportive of integrity and ethical behavior at all levels of an organization. Financial Executives Research Foundation, Inc.

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Study Observation Many companies in our study – whether they are public, private or not-for-profit – describe ethical behavior in terms of a societal covenant, although not all of them used that language. Almost all agree that ethical behavior, and the pressures for not conducting oneself in an ethical manner, can largely be ascribed to a lack of such a covenant. Having a broader view of community translates into practices that are conducive to ethical conduct – for example, the communication of financial information that is timely, accurate and honest. Such covenants also seem to reduce pressure on companies to focus on short-term results and think more about the long-term implications of their actions. Strategic Business Partner and Conscience of the Business Most of the subject outlined above relates to the issue of the inherent conflict of the finance executive as both a strategic business partner and the conscience of the business. The consensus of those interviewed was that the two were not mutually exclusive and that much can be done to maximize performance in both roles. Structural supports, metrics and culture all apply here. Some of the executives we interviewed shared their thoughts on how best to wear finance’s two hats. Arnold Hanish, Executive Director of Finance and Chief Accounting Officer (CAO) of Eli Lilly & Company, says the strategic business partner model of finance has been in place at Eli Lilly for two decades. Hanish is part of the staff of the controller and CFO, but he has the final say on any accounting issue, as well as financial accounting and reporting policies and guidelines throughout the global organization. Thus, structurally, there is a separation of control from business partnership. His office provides centralized accounting and financial services to the business – something akin to a shared services center. “This provides segregation of duties and centralizes expertise.” While allowing for appropriate controls, the CAO and his staff may also be strategic business partners. For example, his people are involved in business development transactions. A member of the CAO’s staff is assigned to every significant business development transaction and deal team. He notes, “I and the team can add more value if we are involved up front, as opposed to accounting for the deal after the fact. From an ethical and practical perspective, an ounce of accounting prevention is worth a pound of after-the-fact reporting.” A member of finance is assigned to every business area. He reports that, generally, finance people are loaned in and out of a business area for a period of about three to five years. This may help them in balancing their two hats. There can be, of course, natural pressures on those finance people who are supporting operations to make the numbers. All employees at every level sign the Red Book, Lilly's code of ethics. In addition, the company recently adopted a financial code of ethics patterned after the FEI code of ethics that all financial management must sign. Cox Communications’ Alderson emphasizes that the financial executive acts as a trusted advisor in shaping, planning, and executing strategy. In this role, he or she is both a respected partner, but maintains autonomy in terms of his/her fiduciary responsibilities. Yet these two hats should not be in conflict. On the contrary, they are complementary for the financial executive must remain autonomous to maintain credibility. As Alderson states, “Integrity is a double edged sword. If you were to succumb to any pressure to [report the numbers] in a misleading way externally, your credibility would be hurt 10


internally. More than ever, the financial executive must demonstrate fairness and objectivity. He or she must be held in high regard personally and professionally.”

Study Observation Financial executives continue to feel strongly about the positive benefits of the businesspartnering model. Most feel the benefits of being involved early in business decisions and financial transactions far outweigh any ethical dilemmas that might occur as a result of being both a business partner as well as the conscience of the organization. In fact, they point out that serving as the conscience fosters more respect as a business partner. Any ethical breech by a financial executive would most certainly irreparably impair their continued ability to partner with the businesses.

Competencies Related to Ethics Financial executives pointed to a number of competencies that contribute to the maintenance of ethical behavior and integrity. Many noted that expertise in basic (and not so basic) accounting/finance skills should not be underestimated. Most, however, pointed to certain softer competencies – the leverage competencies discussed by Frederick C. Militello, Jr. and Michael D. Schwalberg in their book of the same name, which was published last year (Leverage Competencies: What Financial Executives Need to Lead, Upper Saddle River, New Jersey: Financial Times/Prentice Hall, 2002) – as central to integrity-based leadership among financial executives. Alderson offered some thoughtful ideas in terms of skills and competencies that would support ethics and integrity among financial executives. He outlined three categories of skill sets and competencies: (1) job skills (e.g., reporting rules, Generally Accepted Accounting Principles, or GAAP); (2) business knowledge (e.g., knowledge of the industry, customer base and internal operations); and (3) the soft or personal skills (e.g., influence, communication and stress management). He strongly believes in continuing education and training in all of these competencies. Alderson maintains that if an executive is strong in all three areas, he or she “should not need to cheat. I suspect you are more likely to play games if you are deficient in one of these areas.” Again, while most executives would agree with the relevance of all three of Alderson’s categories, most pointed to the softer traits – as either the key to promoting ethical financial behavior – or equally important, avoiding unethical financial behavior. Reflection Many of the executives noted that simply having the ability and taking the time to reflect upon one’s actions, were critical to maintaining integrity. They discussed how ethical breaches are often the culmination of a series of small steps. Huck, for example, notes that financial executives face ethical dilemmas all the time: “If you don’t realize this, you’re probably not paying attention. The financial executive may notice something isn’t quite right. But it doesn’t involve a lot of money, so he or she will let it slide. ‘It’s not material.’ The first step of compromises often involves hiding behind materiality.” Boyadjis speaks for many when he observes, “So much of what we do is driven by the creation of value through increasing the speed of business – shortening time to market, accelerating growth rates, cutting cycle times, etc. But if we as financial executives are Financial Executives Research Foundation, Inc.

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truly focused on value creation for the enterprise, then we must also reflect on the ethics and transparency of transactions and relationships.” He advocates asking oneself a series of questions regarding the decision at hand such as: 'Is this fair to all parties involved? Is this something I can be proud of? Am I willing to see this in the news?' A few simple questions to oneself can make all the difference, he observes. Self-Confidence When asked about specific competencies relevant to ethics and integrity, most executives immediately pointed to self-confidence – having a backbone - as the key competency here. Gary L. Ellis is Vice President and Corporate Controller & Treasurer of Medtronic, the world’s leading medical technology company providing solutions for people with chronic diseases. The company is listed on the New York Stock Exchange and was founded in 1949. Revenues at fiscal year-end 2002 were some $6.4 billion. The company does business in more than 120 countries around the world and has approximately 28,000 employees. Ellis recalled being influenced by hearing a former Medtronic CEO exhorting leaders to live up to the old adage “be true to yourself and your beliefs.” He proudly asserts that those who report to him would tell him to "go to hell" if he asked them to behave in an unethical manner. He is confident they would do what’s right, not just what is asked of them. Huck notes in this regard, “As you construct your job, you have to say that you’re going to be your own person – live by your code of ethics. And you must have the confidence to bear up under criticism, to bear up under the pressure to make the numbers.” Smith discussed self-confidence in terms of having the confidence in one’s ability to succeed. This can buttress an individual from fear of negative consequences for standing by one’s ethical principles and behavior, which he acknowledges can be formidable depending on the environment. He observes, “At the end of the day, you have to look into a mirror.” In the face of any of a variety of personal and professional pressures that may test ones integrity, emphasizes Smith, self-confidence can be invaluable in being able to do so. Nick Cyprus, Vice President, Controller of AT&T, emphasizes that to maintain one’s integrity, the financial executive needs more than good technical competencies. Competencies such as communication, influence and relationship building play an important part in coping with ethical pressures and challenges. He notes, “In the end, you need not just good technical-based accounting skills, but you also need a really good background in ethical behavior and self-confidence. An executive needs to know that if they can’t do the job here, they can do it elsewhere. Sure you have to know the rules, and you have to know right from wrong, but you need a confidence level that says if someone is asking you to do something that you don’t feel comfortable with, you are not going to do it. Let me emphasize this is the big one! I do my best to train my team to be independent thinkers. It’s OK to say ‘no’ around here. Also, my team knows that if you get into trouble, be sure to get me involved.” Corning’s Hunt describes confidence perhaps in a somewhat different way. She explains, “As a corporate accountant you almost have to have a quiet sense of selfconfidence. Frequently, doing your job right means no one knows about it—even you. You really can only be ‘discovered’ if you are doing something wrong. Nevertheless, my advice to financial executives is to focus on being right and to be proud of the fact. 12


And it’s certainly fine to let people know when you are right. However, we can’t go overboard and become flamboyant about this. It could distract from what we are supposed to do. In effect, it’s not the job of the finance person to be in the spotlight. We are supposed to be in the background and have the confidence that we are doing the right thing.” Study Observation Cutting across all requisite competencies for ethical conduct is a single theme; namely, confidence breeds ethical conduct. Consistently, financial executives point to the importance of their ability to say “no.” Confidence comes from one’s technical abilities – knowing one’s job – and knowing one can do it elsewhere, if necessary. Other Characteristics that Support Business Ethics As Cyprus noted, any number of personal skills, such as stress management, influence and relationship building, may support integrity and ethical behavior. Communication was an oft-noted organizational, as well as personal, skill that is relevant here. As discussed above by Hunt, frequent, straightforward communication to one’s stakeholders is ubiquitous at Corning. Hoarding or hiding information is one of the small steps leading to the loss of integrity. Hunt echoed the sentiments of many when she noted, “We like to receive good news fast and bad news even faster.” Of course, skills such as communication and influence can support unethical as well as ethical behavior and leadership. Boyadjis was not alone in emphasizing character. He believes that much of today’s crisis of financial integrity is due to a few highly visible unethical individuals, and that most financial executives “wouldn’t imagine doing what the bad apples have done.” He believes that most ethical behavior comes down to having a value structure that is in place by an early age. He says, “What really matters is an individual’s value structure – tested in relationships and attested to by those with whom you have relationships.” Study Observation Another important competency in promoting ethical conduct is good communication. Financial executives constantly stressed the importance of getting the bad news out there as quickly and honestly as possible. Most observe that ethical problems have a way of snowballing and must be prevented early on.

The Pressures on Ethical Conduct At this point, it may be useful to take a step back and look at why a new ethic of business is desirable, and why financial leaders would want to stress skills and professional attributes that are not necessarily directly related to their financial responsibilities. The executives interviewed for this report generally agreed that unethical acts, some of them egregious, have occurred. While most felt that the actions of a relative few do not represent the vast majority of financial professionals, they did acknowledge facing situations in the course of performing their jobs where they could see why some financial executives would bend or break the rules. Although mitigated by a variety of actions, many of the business pressures they discussed with the authors for this report nevertheless remain areas that require vigilance, reflection and organizational foresight. The executives interviewed for this report, while not by any means justifying the actions that Financial Executives Research Foundation, Inc.

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received such notoriety last year, cited a number of reasons that might explain why some financial executives who have gone astray. The authors of this report believe that while personal greed played a factor, the financial executives who fell victim to the pressures that brought about the recent crisis in financial integrity were not in organizations that supported their function as ethical gatekeepers. Emphasis on Short Term Results Every executive interviewed discussed the emphasis on, and importance of, making the numbers in the short-term as the primary, ubiquitous pressure faced by public companies. Interestingly, this single pressure, and its potential ill-directed manifestations, was equally recognized by private and not-for-profit organizations observing public market behavior and its most influential participants. Let’s look at the observations of several of the interviewees regarding this pressure. According to Medtronic’s Ellis, over the past number of years the pressures that were placed on companies to meet or exceed quarterly guidance numbers, led to a shortsighted approach. He elaborates, “Many companies were riding this bubble and were severely punished if they had any quarterly blips. They got hammered if they missed their guidance numbers by one –cent, regardless if there was a sound long-term business outlook for the company or not. From investors to employees, pressure was placed on senior management as to how the company was to be sure to avoid these blips. As a result, some corporate executives began to push the envelope either on the accounting or even the business side. There were not just accounting snafus but also some really bad business decisions that were made for short-term benefit.” This pressure on short-term results was frequently exacerbated by stock option incentive plans. As Ellis points out, “By it’s very nature, tying business performance so closely to the personal wealth of employees, senior management and the board of directors, can encourage bad as well as good behavior. For example, these incentive plans were great when they encouraged people to do the right things for their companies – but they also likely encouraged some people to hide problems because of all the wealth, or potential wealth, they had tied up in their option incentive plans.” Huck, of Air Products and Chemicals Inc., echoes some of Ellis’s observations. Specifically, Huck notes, “There are tremendous pressures on public companies to perform and to meet specific estimates of earnings. In fact, notes Huck, “Sometimes analysts will be critical if you exceed estimates. There is simply a lack of tolerance for deviation and your professional reputation is often at stake here.” Moreover, he adds, “On the other side, your personal wealth may be at stake due to stock options. These ethical pressures can be very severe especially in publicly traded companies where so much of the focus is on short-term results.” Corning’s Hunt also reflects upon the ideas previously expressed. Specifically, she notes, “I think the pressures of Wall Street indicate that you better have a solid forecasting model.” Financial executives from privately held companies acknowledged that, in this regard, they do not feel the same short-term pressures as those felt by their peers at public corporations. But they do reflect upon how these pressures may have led some companies astray. In many ways, throughout our study, both public and private companies seemed to lament that the market model – or perhaps the most visible proponents of it – Wall Street’s sell-side analysts – had perhaps lost sight of the 14


importance of business fundamentals and the broader interest of one’s community of stakeholders. Orion CFO Braunschweig discussed with us how he does not have the same pressure to make the numbers every quarter as do his counterparts at publicly traded companies. He observes, “In the private sector I would say the stakeholder in many cases is much closer to the financial and operational information. Maybe, in this regard, are there some flaws that are inherent in our capital market structure? In effect what you have done is that you have an intermediary – the industry analyst. This certainly puts more pressure on financial executives to put the very best of light on everything they present to the Street. At the end of the day the ultimate stakeholder of a privately-held company probably receives not only more information but also more accurate information in the sense that it is less filtered and there is certainly no intermediary putting their spin on it.” American TeleCare’s Boyadjis echoes Braunschweig’s observation regarding information layers and intermediaries. Says Boyadjis, “Our constituencies are closer to the company than is the case for publicly held companies. The smaller size of the company lends itself to closer, more personal relationships with its shareholders.” He also noted the inherent ethical dangers of stock options and compensation packages tied to immediate corporate earnings and stock prices. Boyadjis points out, however, that any company can be subject to any number of shortterm pressures and temptations. He discussed how his company walked away from an opportunity that could have led to short-term gains, but rejected it because “It crossed the line. We knew we’d be giving up long-term credibility for short-term gain.” Smith of Mechanical Equipment recalls how early in his career, he faced down pressure by his superior to present misleading financial reports (exhibit inflated profits). Thus, while he too acknowledged the magnified pressures to make the numbers in public corporations, his own experience attests to its importance for privately held companies as well. Study Observation Pressure on short-term results – by analysts and various investor groups – have no doubt contributed to the crisis in financial integrity. However, companies that have a sense of broader stakeholder responsibility – whether they be private or publicly traded entities – seem less prone to these pressures and feel a greater sense of ethical responsibility to get the bad news out the door as quickly as possible. Financial executives coming from these organizations express a greater sense of ethical awareness and societal connectivity given their close ties to local communities and are less prone to isolationist activities that may be prevalent among executives at widely held public companies, where the stakeholders are anonymous. These isolationist tendencies may unwittingly be conducive to unethical financial behavior. Dual Roles of Financial Executives The recent history of finance has been marked by the evolution and emphasis of the financial executive as strategic business partner. Given the place of financial executives as the natural ethical gatekeepers of an organization, some have criticized this model as contributing to the crisis of financial integrity by conflicting with the traditional command/control function/model of finance. Many of those we interviewed Financial Executives Research Foundation, Inc.

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recognized this inherent conflict, although none advocated, what Ellis calls, “climbing back into our silos.” In fact, the overwhelming consensus was that the partnering model was essential for practicing ethical business and financial behavior. Ellis is a strong proponent of the financial executive as a strategic business partner and believes strongly that having finance people involved in their company’s businesses will only help the confidence in the market. The partnering model works and was not responsible for any of the bad financial and business decisions that surfaced in the marketplace. If anything, Ellis points out, “It was not any particular financial or business function that was responsible for what happened, instead it was more a way of thinking and behaving that just made bad business sense.” Ellis goes on to note, “For the most part being involved in the businesses is the right thing. I just don’t see any negatives to a business partnering relationship. Where it might have gotten a little out of kilter is where the finance organization came up with the deals that saved the quarter. If you look at the companies that got in trouble, the deal makers, – the ones that were really coming up with the flavor-of-the-month ideas – they were not assisting the businesses but in almost all cases were creating a completely different business than the original company was even involved in. This is not business partnering. Enron had gotten so far away from its core business model that few business people in the company really knew very much about what was going on. We will be much more successful in bringing back corporate America by being good business partners, but doing so with integrity.” Huck reports that he often discusses the dual role of the financial executive with his people. “Finance has to support the business. We are members of the business team. We assist in getting deals done. On the other hand, we are the conscience of the business team. If we see something is not quite right it is our obligation to speak out.” Many financial executives throughout the interviewing process reiterated this theme of finance as the ethical conscience of the organization. ETS’ Gatti is quick to add, “Finance is the conscience of the organization” and should be held to the highest standards. “If we lose our credibility, there is no way we can comeback from that.” This conscience is part and parcel of almost all financial decisions made by ETS. In fact, it is integral – if not embedded – into the financial decision-making process itself and the relationship that such financial decisions have on all the stakeholders of this company. Ethics can and should be incorporated into the process and operations of making financial decisions. Cox Communications’ Alderson elaborates on the duality of the financial executive. As his role is, in effect, the financial head of an operations unit, he provided a slightly different operations-based perspective on the two hats financial executives may wear. “The first one involves being a member of the senior management team and partnering with the other business executives, actively assisting in the development and execution of business strategy that aligns with short and long term corporate objectives," he explains. “The second is the functional hat, insuring accurate and timely financial reporting in accordance with [regulations]. There may be situations that create tension between your role as a business partner and your fiduciary responsibility to the shareholders.” Lilly’s Hanish echoes Alderson, “They [finance executives] support the business area but have a fiduciary responsibility to corporate finance. We stress that this takes precedence over allegiance to the business area. We (senior financial leadership) reiterate on a 16


periodic basis that budgets and performance metrics are not about hitting the numbers at all costs.” Study Observation Financial executives recognize the potential conflict between their role as business advisors and fiduciary gatekeepers to the corporation’s assets. However, none of them feel that the business-partnering model contributed to the flurry of unethical financial practices that occurred in the markets. On the contrary, involving financial executives as the conscience of the business team is essential to practicing ethical business and financial behavior. What makes sense is to emphasize commitment to the core business and quality products. Economic Downturns Some of the executives interviewed had a historical perspective regarding the pressures that may contribute to unethical behavior. They note that this current crisis of integrity is not unique to our times. Ellis of Medtronic states, “Times of extreme prosperity are naturally followed by leaner times that bring with them numerous pressures. During these times, some executives may lose sight of reality or try to maintain their prosperity even though the business is not doing as well – and they may push the envelope to either stay or get there. It doesn’t mean it’s right but this is not the first time that such situations have occurred.” Deriso of Synovus echoes Ellis’ sentiments, and explains that unethical practices tend to surface when economic fortunes change – especially times of prosperity end and are replaced by downturns. “Such cycles cause abuses to rise to the surface. A company is riding the wave, it dissipates, but earning pressures are still there. Such pressure may breed unethical behavior.” Study Observation All financial executives in this study were open and non-defensive. Most saw the crisis in financial integrity and ethics as part of a natural evolutionary process that has occurred many times in the past after periods of great prosperity or economic bubbles. Accounting Rules Some of those with whom we spoke discussed the place of accounting rules and metrics as potentially contributing to unethical behavior. Most vocal and passionate about the role of accounting in ethical behavior and financial decision-making was AT&T’s Cyprus. Cyprus strongly believes that it is time for the profession to bite the bullet and begin practicing what he calls principle-based accounting versus the present rule-based accounting. He maintains that there must be fundamental changes in accounting. Cyprus notes, “The average investor doesn’t have a clue when reading a financial statement. Accounting has gotten too complex and too easy to abuse, and it has become too easy to rationalize unprincipled behavior by staying within the letter of the law.” Cyprus would prefer that financial executives solve ethical dilemmas not with the rule of thumb of “being in accordance with GAAP but instead by “being in accordance with GAAP and ethics.”


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The implications of Cyprus’s position are rather profound – not only for the direction of the accounting profession but also for the ethical implications of its practices. For example, In a letter to Financial Executives International (FEI), Cyprus explains, “In the post Enron environment, I believe we should take more of a leadership position that focuses on the company’s purpose for doing the transaction, that looks at the true substance and economics of the transaction, in addition to the legal form, in order to determine the appropriate accounting.” He goes on to explain, “This could mean that we, as a professional accounting and finance arm of FEI, actually support less off-balance sheet accounting and higher levels of consolidation. While this may not be in the best interest of corporate balance sheets, it will be in the best interest of the users of financial statements and shareholders. I strongly believe it’s time we restore credibility to our profession. This will not come easy or without a lot of controversy…. In my opinion, additional disclosures will only add to disclosure overload. It’s getting so only financial professionals can understand all the disclosures. Our goal should be to have the financials speak for themselves.” Hunt similarly observes, “I think the accounting rules and regulations, and the interpretations by the accounting firms, have become a lot more difficult and far less intuitive. In the past it was easier to build a foundation of knowledge in the accounting literature. Many accountants if they are not able to stay on top of things, may be losing their confidence in their ability to interpret the rules. Industry has migrated from simply making, selling and shipping widgets. We need to get back to the fundamentals of simply what makes sense and what is the right thing to do.” Study Observation Many controllers interviewed in this study felt that the financial profession will be served well by moving away from an accounting system that is rules based to one that is principle based and more reflective of the ethical realities of business transactions.

External Regulation versus Internal Organizational Responses The Role of Regulations There is a consensus among the executives we interviewed that regulations, while necessary, will not solve the crisis of financial integrity. In fact, some worry that too much of a reliance on regulations can, ultimately, be a detriment to the maintenance of integrity and ethical behavior. Moreover, many financial executives strongly believe that the market will never regain its real confidence in corporate America unless the financial profession addresses what needs to be done to set things right. Looked at this way, some of the financial executives interviewed for this report are concerned that focusing only on regulation and punishment distracts from the notions of ethical leadership and personal and professional responsibility. Related to Cyprus’ admonishment that “staying within the letter of the law” can inadvertently facilitate one to rationalize unprincipled behavior, Hunt also notes that regulations may have the untoward effect of directing attention to what is legal, or safe from litigation, as opposed to what is rigorous, accurate and ethical. She notes, “Another trend that perhaps is bringing the whole profession down – when I look at the litigation activity that is still out there – and the auditing firms that are subject to this litigation – are the representation letters that they ask the companies to sign. They have grown from two pages to twenty 18


or so. Just because they (the auditors) are protecting themselves does not mean they may be protecting the shareholders. In reality, if someone is committing fraud they are still probably going to sign a rep letter.” Besides these immediate regulatory issues and concerns, Hunt also notes that overregulation in the longer-term may scare some people from going into different areas of finance. And summing up the sentiments of the executives on this report regarding the efficacy of regulations, Boyadjis states simply, “Values and ethics can’t be legislated.” Study Observation While all participants certainly believed that financial executives who break the law should be prosecuted, none believed that the answer to the restoration of investor confidence rested with regulatory actions or rule-making bodies. To the contrary, such regulations are increasingly likely to be used as scapegoats for poorer due diligence procedures by auditors and are likely to shift the activities of financial people from highvalue-added to low-value-added activities. According to most, the best cure for restoring investor confidence is for the profession itself to step up to the plate and walk the walk of financial integrity and ethical conduct by establishing organizational support mechanisms to encourage and demonstrate ethical behavior.

Organizational Support for Ethical Behavior Those interviewed discussed a variety of structural factors that may support the maintenance of ethical behavior. Functional support In almost all cases, executives interviewed described the importance of having support mechanisms in place to both support and encourage ethical behavior. Huck emphasizes the importance of a strong functional chain of command within an organization’s finance function as a key support in dealing with integrity-related pressures. Though Air Products’ business leaders have input into performance evaluations, the business operations finance staff report directly to and are reviewed by finance management. Finance supervisors are also expected to support staff should there be any pressures or problems that might threaten to compromise their integrity. Hanish reiterates the importance of finance executives being accountable to, and having the support of, corporate finance. “The operations people understand that their finance member has a certain amount of latitude and some degree of judgment in their work, but ultimately must follow the rules and behave in an ethical manner.” Given the plethora of rules and regulations in the pharmaceutical industry, operations can certainly relate to the numerous accounting and reporting rules of finance, maintains Hanish. If there are any questions or gray areas, the finance representative within operations contacts corporate for advice and direction. “They will be walked through alternatives,” says Hanish, “but in the end, I, or a member of my staff, renders an opinion. The finance member can always say [to operations] ‘I tried, but…’”


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Study Observation One can’t avoid ethical dilemmas and problems – they are inherent in both business and financial processes; however, one can create an environment where such dilemmas are brought to the forefront at an early stage before they have a chance of snowballing throughout the organization. A clear functional chain of command, especially with a strong finance organization at the top, is imperative as a source of support – when facing ethical dilemmas. Organizational Structure It is worth reporting that, while all of the interviewees believed in the importance of having support from corporate finance, pros and cons were noted in regard to having a centralized versus a decentralized organizational structure--an issue debated on multiple planes for many decades. Here too in the field of ethics and its impact on behavior, we have differences of opinion. Synovus a financial institution recognized for its historical emphasis on values and integrity (see Synovus case study, at the end of this report), was criticized recently for having a decentralized structure that may lead to insider loans. Appreciating the complexity of ethical issues, Vice Chairman Deriso stands by Synovus’ decentralized structure and considers too-centralized organizations as more prone to abuse. Deriso explains, “Concentrating too much power in the hands of a few individuals can lead to greed and arrogance. They may forget that they are working for the shareholders – that they don’t own the company.” A decentralized structure, maintains Deriso, allows its leaders to stay close to its stakeholders. This is an interesting theme as in many ways it parallels the thought processes that tend to be more common in privately held organizations. It seems that many public companies are more comfortable with more formal channels of control and communication both internally and to their shareholders. On the other hand, our interviews seem to indicate that internal controls and communications in private companies tend to be less formal, more direct and cover a wider constituency; namely stakeholders versus shareholders. As a public company, Synovus stands out in this regard and perhaps accounts for the fact that it has been consistently named as one of the best companies to work for in America by Fortune Magazine. In this regard, there appears to be no evidence that it’s the tighter controls or surveillance that makes the difference in promoting ethical behavior at publicly traded companies. Instead the bulk of causation appears to have its roots in the market's short-term pressures, – the individuals that impose them and how financial leaders and business executives react to them. Hunt of Corning agreed somewhat with Deriso’s observations, and also noted that some decentralization at her organization might assist in insuring financial integrity. At Corning she observes, “The top people can not make journal entries.” Thus, the ability to input information into various critical financial documents is limited. She also noted that, structurally, multiple lines of communication allow for information – including information that may pertain to ethically questionable behavior – to flow across multiple levels of the organization. Hunt further notes at Corning, all direct reports provide input directly to their boss’ boss as part of annual performance review. For example, Hunt can give direct input to the CFO on the controller’s performance and operating style and Hunt’s direct reports do the same with her boss. Hunt notes, “If I were putting pressure on someone they have an 20


automatic outlet—in addition to fraud hotlines—so it would be extremely difficult for something like that to happen and not surface. Also the way Corning is structured, the financial leaders in our businesses report directly to our general managers, and have dotted lines back into the corporate control function. We have had the model for a long time and we think it serves us well.” In a similar vein, executives viewed having an independent board of directors as a double-edged sword. Deriso, a strong advocate of inside directors, clearly articulates consistency in his views about the importance of family and stakeholders in promoting ethical behavior, when he observes, “The board of directors is interested in what we are doing, in our customers, in our business. They do business with us. We expect them to. We’ll take our way of doing business over [alternative styles]. With the right people – ethical people – and values in place we’ll prosper.” Study Observation While the verdict may still be out, there appears to be a convincing case that tighter, more centralized controls, may not mitigate unethical financial practices. To the contrary, many feel that less centralized control and reporting structures may actually lead to less concentration and abuses of power. Some of the best companies in America continue to feel that there need not be any ethical conflict between those who sit on the board and those that do business with the company.

Codes of Ethics/Mission Statements Many of those interviewed referred to their company’s mission statement or code of ethics. Using such tools to assist in institutionalizing the values of an organization was identified as facilitating the ethical behavior of all of its members. Ellis reports that at Medtronic, there are two reference points regarding ethics – the company mission statement and its code of conduct. All employees including senior management sign the code of conduct. It is also signed by all of the company’s suppliers and distributors. Every major transaction or acquisition at Medtronic is specifically evaluated with respect to the goals of its mission statement and its consistency with the code of ethics. He notes specific examples of how ethics are incorporated directly into the decision-making processes of corporations. “There have been major acquisition opportunities that made strong business and financial sense, which have been turned down because we did not believe they had the same culture or focus on mission as Medtronic. When we compared the cultures and values to our code of conduct and mission statement, no matter how financially attractive they looked, they did not stack up to our merger criteria.” (See the Medtronic case study and Web site at the end of this report). Similarly, Synovus created a number of documents such as its leadership expectations designed to institutionalize its values, upon which its leaders receive formal training. An important part of a team member’s evaluation takes into account the extent to which he or she practices the company’s values. This is discussed further. It is important to note that most of the companies interviewed noted they had in place some form of mission statement and/or code of conduct – and all reported they were able to get their senior management and employees to sign and attest to these. Some Financial Executives Research Foundation, Inc.

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companies reported that their suppliers and distributors were also regular signatories. However, none was able to report any success in getting their bankers or other financial service providers to agree to such statements of behavior nor were they asked to sign any in return. Study Observation Certainly, all financial executives interviewed for this study were cognizant of their company’s mission statements and codes of conduct. However, some of them seemed to incorporate these statements into their financial decision-making processes – using them as almost checklists to evaluate financial transactions from mergers and acquisitions to proposals presented to them by their bankers. There also appeared a desire by most companies to create an awareness of these statements beyond their organizational walls – requesting that stakeholders such as suppliers, distributors and even their bankers sign off on such documents of expected ethical conduct. Ethical Profiling and Selection A number of executives mentioned that their organizations have hiring practices that emphasize qualities that relate to ethical behavior. For example, Art Alderson of Cox Communications reports that new hires at the director level and above are carefully evaluated by an industrial psychologist to assess style and competencies to ensure a good organization fit. While valuing diversity, the selection process works to insure a commonality of basic values. Study Observation Many companies have begun to realize that the best place to begin addressing ethical behavior is during the hiring process. Ethical profiling is increasingly becoming common in the hiring of financial executives at many of the companies interviewed for this study. Evaluation/Rewards As alluded to earlier, evaluating and rewarding ethical behavior and integrity is important. As detailed in the Appendix case study, Synovus is a company that incorporates its values and expected ethical behaviors into its operations. The company also evaluates and rewards adherence to and promotion of these values. Of some relevance here is the use of the balanced scorecard in evaluating personal and organizational performance, practiced by ETS. The balanced scorecard mitigates the tendency towards short-term financial performance. Says Gatti, “We try to motivate people in a manner consistent with our long term goals.” It should be mentioned here that some executives noted that it might be helpful if leaders were acknowledged in some way for their integrity. Ellis commented that financial leaders tend to be honored for being innovative, but not for exhibiting financial integrity.

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Study Observation Behavior, no doubt, is influenced by how your performance is rewarded and your actions perhaps recognized. Consistent with our theme that ethical behavior tends to be the easiest to achieve when financial executives have a broader view of community and society, a parallel shift appears to be occurring in some companies as to how they evaluate the performance of their financial executives. Metrics/Accounting As discussed earlier, many of the executives interviewed emphasized the central role that an organization’s performance metrics can play in the area of ethical behavior and integrity. Alderson of Cox Communications focused on the use of metrics as the bridge between the two hats worn by financial executives. He emphasizes the use of metrics that are clear, meaningful, useful and simple. The same metrics that define and understand the drivers of business are used to report the results of the business. He notes, “From the drivers’ side, metrics quantify fundamentals such as volume, pricing, customer base, cost and overhead expenses. From the results’ side, metrics speak to how we accomplished and behaved relative to the drivers.” One unit of measurement employed by Alderson’s organization is the revenue generating unit or RGU. If there is a video set top box in a customer’s house, that is one RGU, a video and telephone, two RGUs and so on. Average revenue per unit is easily determined. Using RGUs and related measures offer concrete, tangible information, easily understood by finance and nonfinance professionals alike. Notes Alderson, “Clearly defined metrics help the integrity process. It’s hard to play games when the metrics are so specific.” Alderson asserts that a good finance officer helps non-finance people understand and construct useful business measures. Reflecting on the strategic business partner model of finance, he states that business depends on finance for accurate and timely reporting of meaningful results that directly relate to and affect business strategy and decisionmaking. Specifically, Alderson states that “metrics must be quantifiable, measurable and time bound.” Cox Communications has metrics in five categories: revenue, customer satisfaction, operations efficiency, employee satisfaction, and financial results. Alderson asserts that a healthy business takes into account all of these areas. He reports that his organization continually works to act upon and measure each of them and says, “Metrics are not as complex as people make them. If they are used in a [misleading] way, it is usually due to a competency issue or they are being used to cover up performance gaps with bookkeeping.” ETS’ balanced scorecard, which was discussed earlier, is still another example of how the metrics an organization uses both reflect and influence its values and priorities. At Corning, Hunt notes that key metrics focus on cash flow, “We measure EPS etcetera, but also emphasize cash flow.” Hunt advocates this emphasis, as it involves less judgment/interpretation. “How solid are your metrics? Much can influence ‘the numbers,’ but if your measurement is cash, it’s pretty solid. It’s in the bank at the end of the period or it’s not.”


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Cyprus of AT&T, as discussed above, has been actively advocating (He is on the Corporate Reporting Committee of FEI) principle-based accounting as opposed to the present rule based system. He discussed an example in which some of AT&T’s major competitors used accounting interpretations, backed up by a white paper from Arthur Anderson, which allowed them to report a significant increase in their revenues. The reports were within the bounds of regulations but were misleading. There was, naturally, pressure from his company for Cyprus to use the same accounting methods. “I could have used the White Paper and been a hero,” says Cyprus. He chose, however, to be conservative here, and made the case not to use the aggressive interpretation of accounting rules with the other leaders of the company. He reports that the CFO and CEO respected his position as the chief accounting officer of the organization, telling him that they “might not like it but it makes sense.” Cyprus emphasized, in this regard, the importance of having the support at the most upper levels of an organization in maintaining ethical behavior and integrity. In the opinion of Cyprus, “Most controllers will not buck the grain if they are not supported by the leadership of the corporation.” Said Cyprus, “It is rare in life that you see the fruits of a difficult decision.” The questionable accounting of the competitors hit the headlines. “Due to principle-based accounting, we – or anyone else – were not reading about us in the headlines.” He noted that the then president and the future CEO of AT&T “kissed me on the forehead and thanked me for keeping us out of trouble.” Cyprus maintains that most controllers would welcome accounting changes. “Many would like the technical rules to support them in ethical decision-making.” He also advocates independent reporting of controllers to the audit committee. This would give controllers more air cover. Asserts Cyprus, “It is time for change. If we don’t change now it will be taken from out of our hands by people who do not have the right skills to create the kind of [principle based accounting.]” Controllers must take charge in such a way that will allow for meaningful, integrity-based change. Study Observation For some companies, performance metrics have shifted significantly away from financial measures of performance and increasingly toward stakeholder measures such as customer satisfaction and community involvement. In no way do such measures intend to shift one’s emphasis completely away from the importance of making a profit – to the contrary, they just purport to be a better way of getting to the same place. The same holds true for those emphasizing a move toward more principle-based accounting.

Facing Ethical Dilemmas A recurrent theme running through the interviews was that issues around ethical behavior and integrity are not limited to those found in the headlines. Recall Huck’s assertion that financial executives are unaware of the ethical dilemmas they so commonly face so they “are probably not paying attention.” He explains that there are more subtle or mundane ethical dilemmas than the pressure to cook the books. 24


o o o o o o

How do you balance the needs of the group or organization versus the needs of the individual? At what point do you terminate someone? What do you do when the needs or well-being of one group of stakeholders conflict with equally valid needs of other stakeholders? How much latitude do you take in your judgments when your own interests are involved? What do you do if an activity is legal and would benefit you or the organization, but is not ethical? Can you reconcile business ethics with both financial and personal ethics?

Executives point to a number of guides or rules of thumb in resolving such dilemmas. In terms of what guides his own sense of ethics and personal integrity, Huck, a former naval officer, still looks to the honor code of the Naval Academy, from which he is a graduate. At Synovus the emphasis is placed on practicing the golden rule and doing the right thing, at every level. Likewise, Alderson speaks for a number of executives when he recommends a simple rule of thumb, “Know and live by your guiding principles – even if it hurts.” In a similar vein, Hanish maintains, “Ultimately, it gets back to balancing stakeholders and understanding the rules. I’m a professional. I have to look into the mirror.” In addition to the mirror rule, many pointed to what might be called the “reading it in the newspaper” rule of thumb. Huck recommends asking yourself, “How would you feel on the other side of the decision? How would you feel if your wife or kids read about it? This might bring you back to reality.” Boyadjis also advocates asking oneself a series of questions regarding ethical dilemmas, such as “Is this fair to all parties involved? Is this something I can be proud of? Am I willing to see this in the news?” All agree, facing and resolving ethical issues comes with the territory, and is a difficult, imperfect science. Most of the remainder of this report provides some guidelines for addressing ethical issues as they arise. Study Observation Financial executives all stress the importance of one’s personal integrity as a key determinant of ethical conduct. Over and over again, financial executives pointed to the importance of being able to look themselves in the mirror at the end of the day – or even more importantly one’s family.

Tools for Assuring Ethical Behavior

The executives interviewed for this report were asked of their views regarding tools and programs that would help assure ethical behavior and integrity-based financial leadership. Culture As indicated earlier, the culture of an organization was viewed as one of the most important buffers against engaging in unethical behavior. Those interviewed viewed it as one of the most important responsibilities as leaders to insure that certain core values were woven into the fabric of the organization at all levels. Communicating, modelling, and actively reinforcing these values are critical. Setting the tone at the top, using and Financial Executives Research Foundation, Inc.

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training employees on codes of ethics or other formal documents specifying values and expected ethical behavior, and operationalizing integrity in performance reviews were some of the areas that were noted as being worthwhile to work on and develop here. Metrics Reform As noted earlier, many of those interviewed discussed the need and importance of metrics in terms of both being a valued business partner, and facilitating financial integrity. Cyprus advocates fundamental changes in accounting, using principle versus rule-based metrics. In a similar vein, other interviewees noted that the recent emphasis on transparency – which was universally supported – has had the untoward effect of increasing, rather than decreasing, the complexity and incomprehensibility of financial reporting to the average investor. Specifically, executives advocate the development of metrics that are: 1. 2. 3. 4.

Clear, useful, simple and meaningful. Tied to the drivers of business. Designed to assist in business planning, development and implementation. Encouraging of (rather than discouraging of) ethical behavior.

Ethics Training All executives felt that formal training programs were important especially in terms of dealing with more complex ethical dilemmas and the tendency for unethical behavior to be the culmination of a series of ill-advised steps. In these instances, all agreed that ethics training programs would be very beneficial. Some, like Synovus already incorporate such training in their leadership programs, using experts in the field of ethics. Every financial executive with whom we spoke about such training emphasized the importance of making it as real and relevant as possible. Most specifically discussed the importance using case studies or conferences in formal training programs. Recently, Cyprus organized an ethics program affiliated with New York University, which included senior controllers from across the nation. The program, hosted at AT&T’s corporate headquarters, involved analyzing a variety of situations in terms of their ethical implications and how to deal with these situations. Cyprus notes, “In addition to standard controls such as a code of conduct and good background checks, other controls could also be used. For example, financial people should be trained to identify and understand ethical and unethical behaviors and situations. I like to get all my controllers and their key leaders to do just that. We break up into teams, where each team gets a different business situation to deal with. They then have to come back to the broader group and discuss how they decided to resolve it. Basically, I give them the interesting situations I see on a day-to-day basis – not the headliners, but the stuff you really tend to confront all of the time. What’s important is that the training gives them an opportunity that when they actually see such a situation, they know what to do. You have to set the right tone, and ethics training helps in that regard.” Hanish reports that for several years – “long before this latest round of financial failures” he has led a series of Eli Lilly training programs that use case studies related to ethics in finance. Highly publicized cases of questionable accounting, such as Sunbeam and Bausch & Lomb, are examined in detail to raise awareness and learn from the mistakes of others. These case studies take place globally, in various staff sessions and conferences. In addition, as part of an orientation program for new hires, they are introduced to these case studies as well as various ethical dilemmas. These dilemmas 26


may be as simple as what to charge as a business expense while traveling and serve to “get people thinking about right and wrong, and where one may cross the line.” Hunt recalled a speaker, Joseph Badaracco, Jr., at a recent FEI conference who discussed right versus right ethical dilemmas. In his book, Defining Moments: When Managers Must Choose Between Right and Right, Badaracco highlights the complexity of resolving ethical dilemmas, irrespective of one’s level of integrity and high-minded values. Hunt was impressed by the sophistication of the thinking here, and gained some respect for the field of ethics and ethics training. As Hunt points out, “Training for financial people in ethics is a good idea – a very good idea! When financial people are growing-up in a business partnering model environment, they are part of a team and become sensitized to the views of other constituencies. For example, the finance person may advocate closing a plant to cut costs, but the operations function notes that preserving skill sets is important, while the HR person points out the community implications of a possible plant closure. In situations like this, a financial person is learning and they are getting “on the job training in the moral and ethical consequences of their decisions. I am not sure how you teach this without creating case study experience to be shared with people who do not think like a financial person.” Thus, while many would agree with Boyadjis, who stated that before agreeing to host an ethics training program, he would “have to see the syllabus,” those interviewed were extremely open to such programs, especially if they offered a system that would actively assist executives in maintaining integrity-based financial leadership and increasing awareness of and resolving ethical dilemmas.

Study Observation Companies are beginning to think about ethics training. Almost all agree that exposing individuals to typical situations in which ethical dilemmas frequently occur can create significant value. It’s important that financial people see the implications of their decisions from the perspective of others. It’s important to get financial people thinking about right versus wrong – or even right versus right – while financial decisions are being made as opposed to after the fact when it’s already too late.

Conclusion The Ethically Intelligent Financial Executive Overall, the interviews suggest a portrait of the ethically intelligent financial executive. She or he is aware of the multiple pressures that may potentially impinge upon the maintenance of one’s integrity. He or she is further aware of the ubiquitous presence of ethical dilemmas faced by leaders in daily business life and takes the time to reflect upon these dilemmas. Ideally, the executive will have received some training or education to provide increased sophistication regarding the area of ethics and concrete tools to assist in maintaining one’s integrity and resolve ethical dilemmas. The ethically intelligent executive will also benefit from being emotionally intelligent, or skilled in the leverage competencies discussed by Militello and Schwalberg (2002). Self-confidence and related competencies such as assertiveness, communication skills, self-control, and stressmanagement can be critical in maintaining ones integrity when navigating ethically dangerous waters.


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Ideally, too, the financial executive will continue to be a valued business partner who actively assists the business in planning, development, and implementation of projects and goals. However as the conscience of the organization, he or she at times must say no. He or she will also be proactive in the use of metrics that are clear, meaningful, and useful. The ethically intelligent financial executive sets the tone at the top and leads by example. A highly visible role model, he or she uses every opportunity to articulate and demonstrate high integrity behavior to the finance organization and the organization as a whole. This is the meaning of integrity-based leadership. The Ethically Intelligent Financial Organization Our interviews also suggest the ideal ethically intelligent financial organization. As noted earlier, there may be some debate regarding certain aspects of this ideal. This caveat not withstanding: The ethically intelligent financial organization walks the walk of integrity. Structurally, it strikes a balance between centralization and decentralization. On the one hand, concentrating too much authority in a few may encourage the abuse of power. On the other hand, a strong functional chain of command, with a strong finance organization at the top, can be an important source of support for those financial executives working closely with operations. The ethically intelligent organization will have codes of ethics and mission statements, or similar documents that are worth their weight in gold. Formal training on such documents and clear communication from the most senior leaders of the organization that every employee is expected to live by the rules and values spelled out in these documents, are imperative to this end. In addition, companies may want to consider a series of educational programs and forums directed specifically to the financial community to foster ethically intelligent financial executives and finance organizations. Rewarding integrity and integrity-based leadership is critical. Tying performance appraisals to living a company’s values and demonstrated integrity is one method to do so. The metrics an organization uses – e.g., a balanced scorecard - come into play here. So, too, do the system of bonuses and stock options provided by the organization. Some organizations set the tone at the bottom as well as the top, working with professionals (internal or external) who assist them in selecting and orienting high-integrity new hires. The ethically intelligent financial organization moves beyond a narrow focus upon shareholder value into a broader focus upon stakeholders. While addressing short- term pressures and obligations, it takes a long-term perspective on the value it provides to its shareholders and other stakeholders. Again, the metrics emphasized by an organization can reflect a broader stakeholder approach to business. Somewhat more controversial, but consistent with a stakeholder focus, the culture of ethically intelligent organizations increasingly seems to reflect adherence to the Covenantal Ethic model of capitalism as opposed to the Enlightened Self-Interest model. The Covenantal Ethic model defines the creation of value and the well being of others is the primary purpose of business and holds profit as a secondary contractual condition. Business being, at its heart, a social contract of mutually beneficial obligations, the primacy of relationships naturally emanates from this model. Assuming ethical behavior, both models should lead to the maximization of shareholder value in the longer-term.

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The researchers found, however, that embracing the Covenantal Ethic model more readily assisted some of the companies in this study in attaining their goals of the ethically intelligent finance executive and ethically intelligent organization. This appeared true for both public and privately held organizations. Moreover, today’s corporate social responsibility (CSR) movement and growth of non-government organizations (NGOs) is placing more and more pressure on corporations to rethink their business models in this direction. In this respect, the ethically intelligent finance organization – and financial executive – has an opportunity to make a difference by setting the right example and appropriate tone. Ideally, and financial executives seem to agree, there should be no difference between one’s personal ethics and business ethics. In today’s atmosphere, it is no longer acceptable to rationalize bad behavior by deferring to the notion that business is business. A business model paradigm shift is occurring, perhaps driven by growing ethical awareness and social responsibility. In the authors’ observations, the executives in this study welcome a vision of business in which integrity is not something to be checked at the corporate door, but is an integral part of life in and out of business and an integral part of all financial decision-making processes.


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Medtronic Building Integrity into Financial and Business Decision-Making Gary L. Ellis is Vice President and Corporate Controller & Treasurer, of Medtronic, the world’s leading medical technology company providing solutions for people with chronic diseases. The company is listed on the New York Stock Exchange and was founded in 1949. Revenues at fiscal year-end 2002 were some $6.4 billion. The company does business in more than 120 countries around the world and has approximately 28,000 employees. Why Some Go Astray Similar to many of the executives we interviewed, Ellis began by adding a historic perspective to today’s crisis of financial integrity. According to Ellis, “Times of extreme prosperity are almost naturally followed by leaner times that bring with them numerous pressures. During these times, some executives may lose sight of reality or try to maintain their prosperity even though the business is not doing as well -- and they may push the envelope to either stay or get there.” Ellis is quick to point out, it doesn’t mean its right but that this is not the first time that such situations have occurred. On top of these historic realities, Ellis also notes that there were a number of additional factors that contributed to the ill-advised actions of some financial and business executives. Certainly, option incentive plans may have had a contributing impact to unethical business practices. Such plans have both a positive and negative side to them. As Ellis notes, “By it’s very nature, tying business performance so closely to the personal wealth of employees, senior management and the board of directors, can encourage bad as well as good behavior. For example, they were great when they encouraged people to do the right things for their companies – but they also likely encouraged some people to hide problems because of all the wealth, or potential wealth, they had tied up in their option incentive plans.” Couple these incentive plans with the pressures that were placed on companies to meet or exceed quarterly guidance numbers, led to a shortsighted approach leading many companies to push things a bit not only on the accounting side but in some ways even more importantly on the business side as well. Ellis notes, “Many companies were riding this bubble and were severely punished if they had any quarterly blips. They got hammered if they missed their guidance numbers by one-cent regardless if there was a sound long-term business outlook for the company. From investors to employees, pressure was placed on senior management to make sure the company avoided these blips. As a result, some corporate executives began to push the envelope either on the accounting side or even the business side. There were not just accounting snafus, but also some really bad business decisions that were made for a short-term benefit. Finance People are Good for the Business Ellis believes strongly that having finance people involved in their company’s businesses will only help the confidence in the market. The partnering model works and was not responsible for any of the bad financial and business decisions that surfaced in the marketplace. If anything, Ellis points out, “It was not any particular financial or business function that was responsible for what happened, instead it was more a way of thinking and behaving that just made bad business sense.” Ellis goes on to note, “For the most part being involved in the businesses is the right thing. I just don’t see any negatives to a business partnering relationship. Where it might have gotten a little out of kilter is where the 30


finance organization came up with the deals that saved the quarter. If you look at the companies that got in trouble, the ‘deal makers,’ the one’s that were really coming up with the flavor of the month ideas, were not assisting the businesses but in almost all cases were creating a completely different business than the original company was even involved in. This is not business partnering. Enron had gotten so far away from its core business model that few business people in the company really knew very much about what was going on.” Ellis maintains that some of the pressures behind the crisis of financial integrity remain. For example, he notes that shortsighted quarterly reports have become even more stressful, with skittish investors being even more sensitive to any negative news. And due to the increased regulations and public scrutiny, and the fact that “no one wants to be the next name in the newspapers,” the amount of financial information disclosed has increased dramatically. Ellis says, “We now err on the side of being ultraconservative – squeaky clean. In the past year, our disclosures in our annual report increased by some 60%, and we will continue to do this until we feel the market has gained its confidence back.” However, Ellis is quite perceptive in noting that, “More disclosure does not always mean greater understanding, but it may mean less legal liability.” He agrees that more disclosure might even be worse for the typical shareholder. “Attempting to read through more detailed financial statements and footnotes almost makes it more difficult for them to know what’s going on.” The finance department is now also spending more time with the audit committee. With an emphasis on explaining not only what financial decisions have been made but also the associated risks and how others might look at them differently. “Years ago, we would have never spent this much time on explaining all the risks and options. We would have kept it simple, e.g., here’s what we did and why? Perhaps, the pendulum has swung too far the other way now even at times avoiding anything that can be a concern. This can stifle growth and innovation and can contribute to slowing down the economic recovery. All the time and energy we now spend on governance and accounting issues takes time and focus away from operations.” Confident Financial People Make for Ethical Decision-Makers In discussing competencies that are important in maintaining one’s integrity, Ellis like others in this report, emphasizes the importance of self-confidence. Ellis wants people to speak their mind not just on finance issues but on business issues as well. He remembers hearing a former CEO of Medtronic exhorting leaders regarding living up to the old adage be true to yourself and your beliefs. “If you can’t do that where you work, then you are at the wrong company and should pick yourself up and leave.” He proudly asserts that those who report to him would tell him to go to hell if he ever asked them to behave in an unethical manner. He is confident that those who report to him would do what’s right and not just what is asked of them. In discussing some measures to foster integrity, he believes that education and training in ethics would be productive at the university level. “They should learn early on what the pressures are out there, what you should do, and how you go about it, etc? That would be a good start.” He also feels that we should honor those leaders who have consistently exhibited integrity. Ellis says, “We have had a tendency to honor only those who have displayed the unusual – the dealmakers who have come up with the unique stuff. We just don’t tend to reward integrity as much as we do innovation and that’s a great mistake.”


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Templates for Ethical Decision-Making Ellis was asked if ethics or integrity could be built into the financial decision-making process. He responded quickly and said, “There are both a need for so doing and certainly a place for such thinking.” For example, at Medtronic, there are two reference points regarding ethics – the company mission statement and its code of conduct – [see accompanying exhibits. Ellis explains, “When looking at any major transaction or acquisition these two pillars become our guiding lights.” For example, every acquisition at Medtronic goes through a comparison test; specifically, does this acquisition meet the goals of our mission statement and comfortably conform to our code of conduct? Ellis notes, “If we are uncomfortable with the management, or the culture of the target organization, relevant to our mission statement or code of conduct, then we won’t do the deal no matter how attractive it may be. There have been major acquisition opportunities that made strong business and financial sense, but have been turned down because we did not trust that this was the case. We looked ourselves in the eye and could not agree that the acquisition target had the characteristics we would feel comfortable with.” Besides using these pillars for making business decisions, the company also requires all employees and senior management to sign a code of conduct. Today, it is also signed by all of the company’s suppliers and distributors. For viewing the mission statement and code of conduct of Medtronic, visit their website at www.Medtronic.com.

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Synovus – Practicing Leadership Expectations A Culture of the Heart Synovus was one of the case studies featured by Militello & Schwalberg. What made this study especially valuable was its focus on values and ethics. As we noted in that study, Synovus is a company that was founded over 100 years ago by religious, spiritual individuals striving towards high ideals. According to its 1998 annual report “Every decision we make, every action we take, is based upon our most fundamental ideals, the beliefs that built this company. Treat people right. Do what’s right. Everyone should know someone cares.” These basic values and priorities have resulted in what has been called a culture of the heart. It is this culture that resulted in Synovus being selected by Fortune magazine as the “Best Company to Work for in America” in 1999. The company experienced tremendous growth in recent years. Its leadership developed a number of initiatives, formal structures and programs to ensure that its cultural values continued to find expression and were taught, nurtured and expressed daily throughout the Synovus family of companies. As we outlined in the study, this is a company that walks the walk in terms of its values and integrity, and did so before it became fashionable. It should not be surprising, then, that, in a recent S&P white paper/survey, Synovus was listed as one of six companies in the S&P 500 that received the best rankings for financial disclosure in its annual report. Ethical Ambiguities Synovus is revisited here with an interview with Walter (Sonny) Deriso, Jr., Vice Chairman of the Board, Synovus. Deriso discussed how, in the context of the present atmosphere brought on by the crisis of financial integrity, even Synovus, so acknowledged for its integrity, can come under attack. Recently, he reported, it was criticized on elements of its decentralized structure, leading to insider loans. He suspects, however, that the criticism came from a short seller and the markets did not buy it. Another criticism came from Forbes. The CEO, James Blanchard, was criticized for hiring someone who was the son of an affiliate. The company stands by its policy here, as it feels a strict anti-nepotism rule would be too limiting, depriving the company of talent and forcing these people to work with other companies, including competitors. “We are not willing to say we are not going to hire someone simply because he or she is someone’s child.” These are some examples of the complexity in the area of ethics and integrity in today’s day and age. Ethics and ethical tradeoffs are rarely cut and dry. Returning to the issue of decentralization, for example, Deriso discussed how, while such a structure may be subject to criticism, a centralized structure may be more prone to abuse. Concentrating power in the hands of a few individuals, he believes, leads to greed and arrogance. “They may forget that they are working for the shareholders - that they don’t own the company.” A decentralized structure, among other things, allows its leaders to stay close to its stakeholders. In a similar vein, the board of directors is not independent. “The board of directors are interested in what we are doing, in our customers, in our business. They do business with us. We expect them to. We’ll take our way of doing business [over alternative styles] – with the right people – ethical people, we’ll prosper.”


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Coping With Pressures Deriso takes a historical perspective in discussing the present crisis of integrity. He notes that unethical practices tend to surface when economic times – especially times of prosperity – change. “Such cycles cause abuses to rise to the surface. A company is riding the wave, it dissipates, but earning pressures are still there.” Such pressures foster unethical behavior. Like the others we interviewed, he points to the short-term quarterly pressures to make the numbers. In discussing this pressure, he noted “We realize that we owe an obligation to shareholders to do well in the short term. However, we view [the company] as a longterm investment. We focus on long-term value.” This long-term focus is a function of Synovus’ 100-year-old culture, discussed above. They do not focus exclusively on shareholders, but on doing the right thing by a number of stakeholders, including shareholders, customers, team members, and the community. Says Deriso, “There is much more to focus on than earnings and short-term performance. We are accountable to all of our stakeholders - for living the values, applying the golden rule. We make it clear that if you are not doing so you must go some other place. The culture will not tolerate the kinds of [unethical behavior] that has taken place elsewhere.” At our last interview, Deriso introduced the concept of servant leadership, and we revisited this again. “A servant leader focuses on the needs of the stakeholders, on serving the greatest needs of the people, not on oneself. There is no place for lack of integrity here.” Transmitting and Rewarding Core Values That leaders at Synovus live and transmit these values is actively pursued, discussed and evaluated. In fact, within the compensation structure, says Deriso, there is an element that deals with people development, and people development includes focusing on core values. At the center of leadership development at Synovus are leadership expectations (Militello & Schwalberg, 2002, p. 149). This leadership model outlines four fundamental ideals: live the values, share the vision, make others successful, and manage the business. Note that three of these four ideals focus upon values. Also note that at the center of this model is the Synovus value chain: people, culture, strategy, action, performance and value. The business philosophy of leadership expectations is ubiquitous at Synovus. The company’s leadership development programs, directly or indirectly, relate back to this idea, which in turn connects back to the company’s core values. Much attention is given to the development of competencies that support the expectations and their components. The CEO holds weekly meetings with hundreds of leaders at all levels, continually reinforcing company values and leadership expectations (Militello and Schwalberg, 2002) On Reporting and Corporate Governance As noted earlier, Synovus was listed as one of six companies in the S&P 500 that received the best rankings for financial disclosure in its annual report. Deriso discussed how an analyst from Goldman Sachs recently visited the company. “We fully disclose everything they need to know, without being coy or deceptive. This is the same way we deal with bank regulators. If there is a problem, we want to know as quickly as possible so we can

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address it. The rule of ‘Give me good news fast and bad news faster’ is paramount here. The company wants to address any problems as quickly and openly as possible.” Three years ago, Synovus conducted a review of corporate governance issues, evaluating such areas as the independence of directors, auditing committees, and conflicts of interest. In light of the recent highlighting of ethical issues and new regulations, they reexamined these areas. Outside auditors, legal counsel, and a variety of leaders, including the CFO, reported on the state of the company vis-à-vis these issues, including where the company is regarding the new Securities and Exchange Commission (SEC) regulations. Deriso says, “The upshot of this review is that it appears we will be in compliance with the SEC, in both the spirit and letter of the law.” On Ethical Dilemmas Ethics and integrity, however, go beyond company malfeasance and clearly unethical behavior. Day-to-day ethical dilemmas are equally important to address. Personnel matters, customer issues, stakeholder conflicts and gray areas are common, explains Deriso. Relevant leadership teams commonly discuss such issues. In doing so “Our values are put out on the table. We attempt to apply these values, communicate regarding ethical issues/dilemmas, and work to do the right thing. “The golden rule is brought in on a regular basis.” To assist team members in addressing ethical issues and challenges, an integral part of Synovus’ leadership training programs includes ethics training, facilitated by experts in this area. In fact, asserts Deriso, “Much of our leadership program is developed around ethics.” Doing the Right Thing Overall then, Deriso maintains that the crisis of financial integrity is due to a failure of leadership – of leadership accountability and integrity. “Ultimately, regulations don’t accomplish that.” Deriso noted that since our last interview, the company formally established Our Customer Covenant on its Web site. This spells out the company’s values vis-à-vis its customers. “It is on every desk and in every wallet.” The customer covenant is very much in line with a culture that lives by the Covenantal Ethic model of business. This is a model (see Responsibility to Stakeholders versus Shareholders under Culture and Ethical Behavior in the main text) that puts relationships before profits. Here, the bottom line is important, but is a secondary contractual condition that follows the creation and deliverance of value to those with whom the company has a covenant. At Synovus, doing the right thing is not simply a means to an end. It is a core value followed for its own sake. Living by the golden rule may appear to be naïve. And indeed, Deriso is the first to acknowledge the complexity involved in ethics and integritybased leadership. He also acknowledges that the company and its leaders are far from perfect. That living one’s values and ideals is an ongoing, imperfect process. But in reading the seemingly daily headlines, one cannot help but reflect upon the loss of such simple values as those worked upon so diligently at Synovus.


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Appendix Reading Corner Much material has been written on the subject of business ethics. The following is a brief list of books that will assist financial executives and their organizations in becoming ethically intelligent: Joseph L. Badaracco, Jr. Defining Moments: When Managers Must Choose between Right and Right (Boston, Massachusetts: Harvard Business School Press, 1997). A very thoughtful book that offers practical advice for reflecting on right-versus-right ethical conflicts and the steps taken to resolve them. Leaders inevitably face ethical dilemmas, the alternative solutions to which may both be right, but there is no way to do both. That is, despite the best of intentions, a leader will not always be able to do the one right thing. Badaracco labels these all too common situations as defining moments, or moments that involve decisions that reveal, test and shape the character of the person and/or organization. Drawing on philosophy, literature, and case studies, Defining Moments provides a flexible framework and concrete steps to use in navigating ethically dangerous waters. John R. Boatright. Ethics in Finance (Malden, Massachusetts: Blackwell Publishers, 1999). As the title indicates, this book specifically focuses on the emerging field of finance ethics. It provides a rigorous analysis of ethical issues in finance, combining relevant theoretical perspectives in financial ethics with a multitude of practical, relevant examples that cross the full range of the finance profession. As Boatright explains, “People trained in finance enter many different lines of work, in which they encounter a variety of ethical dilemmas.” Covering ethical issues in financial services, investment decisions, financial markets, and corporate finance, this book represents an important primer for both business student and financial executive alike. Frederick C. Militello, Jr. and Michael D. Schwalberg. Leverage Competencies: What Financial Executives Need to Lead (Upper Saddle River, New Jersey: Financial Times/Prentice Hall, 2002). The strategic business partner model of finance has magnified the importance of the critical soft skills of leadership for financial executives. These leverage competencies encompass a broad array of personal and social competencies that determine one’s emotional intelligence. Many, if not most, of these directly or indirectly relate to one’s ethical intelligence as well. Self-awareness, self-confidence and self-regulation are critical in identifying and coping with ethical issues on a personal level, while competencies such as communication, influence, empathy and conflict management assist the financial executive in resolving – and perhaps preventing – ethical problems. Simply put, those interested in maximizing their ethical intelligence must develop their emotional intelligence to its fullest. Laura L. Nash. Good Intentions Aside: A Manager’s Guide to Resolving Ethical Problems (Boston, Massachusetts: Harvard Business School Press, 1997). As the title implies, this book guides – in a simple, practical and concrete manner – the reader in resolving ethical problems in which good intentions are not enough. Nash convincingly offers the Covenantal Ethic model as an alternative to the predominant Enlightened Self-Interest model of capitalism. While on the surface, such an endeavor 36


may appear to be naïve or unrealistic, the author does a commendable job of using this model as the platform from which to maximize ethical behavior and personal and organizational integrity. Of equal value, she deftly employs a variety of questions and propositions that assist one in grappling with a wide variety of ethical roadblocks, traps, and challenges. Valuable real life examples and case studies, drawing from the author’s extensive interviews with scores of business leaders, are found throughout the book. Jeffrey L. Seglin. The Good, the Bad, and Your Business: Choosing right when ethical dilemmas pull you apart (New York: John Wiley & Sons, Inc., 2000). As discussed by Seglin, this is a book written, in part, “as an attempt to draw a distinction between behavior based on a fear of litigation versus behavior driven by ethics.” He also maintains that he wrote the book as a search for a comfort level among conflicting spheres of business that executives operate in: money, people and the common good. He works to assist us in articulating the ethical dilemmas commonly encountered when attempting to balance the (often conflicting) needs of a variety of stakeholders. He uses real-life business dilemmas to illuminate the ethical decision making process and the impact of ethical decisions on those who make them, the business and all of its constituencies. Robert C. Solomon. A Better Way to Think About Business (New York: Oxford university Press, 1999). Solomon, a well-respected ethicist, offers a brief but powerful work, which, is a program in ethics. First, he explores how business goes wrong from an ethical perspective. Solomon makes a compelling case that faulty thinking, vision, myths and metaphors block our sense of integrity and lead to the wrong kind of values and behavior. He then provides a vision of business that, he argues, comes closer to Adam Smith’s vision of the free enterprise system than “the narrow picture of the world often defended in his name.” With the right way of thinking about business, says Solomon, “integrity can become a core value of corporate life and corporate leadership at every level.” His final section is a practical, working catalogue of business virtues. Interestingly, most of these virtues overlap with competencies, so commonly used now in corporations (e.g., performance appraisals, potential assessment and succession planning). This catalogue can assist enterprising organizations in converting business competencies into business virtues – perhaps employing virtue models in much the same way competency models are employed. Finally, Solomon includes an interesting section on ethical styles and how they may interact.


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About the Authors Frederick C. Militello, Jr. Senior Partner, FinQuest Partners LLC [email protected] For more than 25 years, Frederick Militello has been an advisor to financial executives from both corporations and financial institutions around the world. With an emphasis on leadership development and strategic financial thinking, Mr. Militello is currently responsible for FinQuest’s corporate consulting activities as well as conducting business strategy workshops for the firm’s most important banking clients. He has been a Managing Director for the Chase Manhattan Bank and was responsible for their Merchant Banking and Treasury Consulting activities out of both New York and London. Over the years, he has advised corporations on a multitude of financial transactions and financial strategies designed to enhance their competitive positions in global capital markets. For the past dozen years, he has dedicated himself to the advancement of financial knowledge working through such organizations as the Financial Executives International, Management Center Europe, the American Management Association and the Society of Management Accountants of Canada in bringing the latest financial management thinking to financial executives around the world. He has authored many articles and books; his most recent being Leverage Competencies: What Financial Executives Need to Lead, Sponsored by Financial Executives Research Foundation and published by Financial Times/Prentice Hall, 2002. Frederick is also an adjunct professor of finance and international business at New York University’s Leonard N. Stern School of Business. Here he teaches both international financial management and global banking and capital markets to hundreds of the school’s graduate students each year. He has held financial executive positions for such firms as USS Corporation, Mobil Oil Corporation, Business International Corporation and Bank of Boston International. In 1969 he was awarded the Wall Street Journal Student Achievement Award in Economics. He holds a BA and MA in economics from Pace University and MIA degree in international finance and economics from Columbia University’s School of International Affairs. Frederick is very active in community affairs having held positions as Chairman of the Durham Historic Preservation Commission, Director of the Durham Land Preservation Trust, and Director for the Children’s Media Project (CMP).

Michael D. Schwalberg, Ph.D. Senior Partner, Hudson Valley Psychology Associates, PLLC [email protected] Dr. Schwalberg has worked with a wide range of clients in developing the skills and tools necessary to implement ethical business behavior and leverage business competencies such as effective communication, financial executive influence and team work – including executives from some of the world’s leading organizations, such as American Express, Banco Popular, Bristol Myers and Unilever. His most recent publication was Leverage Competencies: What Financial Executives Need to Lead, sponsored by the Financial Executives Research Foundation and published by Financial Times/Prentice Hall, 2002. He graduated Phi Beta Kappa from Emory University, received his doctorate in Psychology from the State University of New York at Albany, and he interned at Brown University. Dr. Schwalberg has worked on research projects at Brown University, the State University of New York at Albany, Fairleigh Dickinson University, and the New York Hospital – Cornell Medical Center. Currently, he is a partner at Hudson Valley Psychology Associates, PLLC, where he provides consultation, counseling, and coaching services. He’s on the Advisory Board of FinQuest Partners, LLC, where he works closely with the firm in developing its seminar programs and organizational consulting services in the fields of performance metrics, financial executive coaching and psychological profiling in a wide area of behavioral competencies including ethical behavior and business decision-making.

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Financial Executives Research Foundation, Inc. Copyright © 2003 by Financial Executives Research Foundation, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means without written permission from the publisher. International Standard Book Number 1-885065-50-7 Printed in the United States of America First Printing Financial Executives Research Foundation, Inc. is the research affiliate of Financial Executives International. The purpose of the Foundation is to sponsor research and publish informative material in the field of business management, with particular emphasis on the practice of financial management and its evolving role in the management of business. The mission of the Research Foundation is to identify and develop timely, topical research to advance the financial management profession. The Foundation’s work is educational rather than editorial. The Foundation is an independent 501(c)(3) educational organization. The Foundation receives no portion of FEI Members dues; rather, it relies on voluntary tax-deductible contributions from corporations and individuals. The views set forth in this publication are those of the authors and do not necessarily represent those of the Financial Executives Research Foundation Board as a whole, individual trustees or the members of the Advisory Committee. This and more than 50 other Research Foundation publications can be ordered by logging onto www.fei.org/rfbookstore. Discounts available to FEI members and Foundation donors.


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Best Practices for Sarbanes-Oxley Implementation A Comparison of Alternative Models for Valuing Employee Stock Options Benchmarking the Planning Process—World Class Companies vs. Average Companies Audit Committee Charter—For Privately-Held Companies

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2002 Year-End Tax Planning Strategies (free download for FEI members) Year End Issues Update for Benefit Plan Sponsors

•

Sarbanes-Oxley Act of 2002—A Financial Executive Checklist

(free download for FEI members)

(free download for FEI members) (free download for FEI members)

•

NASDAQ Corporate Governance Proposals—A Financial Executive Checklist (free download for FEI members) NYSE Corporate Governance Proposals—A Financial Executive Checklist

• • •

Corporate Reporting and the Internet—Understanding-and Using-XBRL Information Security—Keeping Data Safe (free download for FEI members) Commercial Insurance—Strategies for Renewal

•

Self-Directed Brokerage Accounts in 401(k) Plans

•

Business Performance Intelligence Software—A Market Evaluation

•

• •

(free download for FEI members)

(free download for FEI members) (free download for FEI members) (free download for FEI members)

Promoting Ethical Conduct—A Review of Corporate Practice (free download for FEI members)

MD&A Trends and Techniques—How Leading Companies Promote Transparency (free download for FEI members)

To download selected free reports or www.fei.org/rfbookstore or call 973-765-1012.

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SEC Guidance for Management's Discussion and Analysis

Modern structural analysis: modelling process and guidance

SEC XBRL Mandate for Dummies Handbook

Arhitectura Sec Xx

Contractual Obligations Disclosed in Management's Discussion and Analysis

The Guidance

The Guidance

Contentious Issues: Discussion Stories for Young People

Meeting the Street: A Discussion of Earnings and Other Guidance Provided to Investors

The Guidance

Corporate First Amendment Rights and the SEC

Risk Management: Concepts and Guidance

Principles of Guidance and Counselling

Living with Angels: Guidance for Your Soul

Missile Guidance and Control Systems

Evaluating Career Education and Guidance

Respectable Sins, Discussion Guide

Guidance for Industry Sterile Drug Products

Rippling: Meta-Level Guidance for Mathematical Reasoning

Technical Guidance for screening contaminated Sediments

A Guidance Approach for the Encouraging Classroom

Configuration Management: Expert Guidance for IT Service Managers and Practitioners

Assessment of Mental Capacity: Guidance for Doctors and Lawyers

Good Laboratory Practice: OECD Principles and Guidance for Compliance Monitoring

Handbook for good clinical research practice (GCP): guidance for implementation

Handbook for good clinical research practice (GCP): guidance for implementation

Industrial Statistics: Practical Methods and Guidance for Improved Performance

Handbook for Mortals: Guidance for People Facing Serious Illness

Rocky User Guidance

SEC Guidance for Management's Discussion and Analysis

Modern structural analysis: modelling process and guidance

SEC XBRL Mandate for Dummies Handbook

Arhitectura Sec Xx

Contractual Obligations Disclosed in Management's Discussion and Analysis

The Guidance

The Guidance

Contentious Issues: Discussion Stories for Young People

Meeting the Street: A Discussion of Earnings and Other Guidance Provided to Investors

The Guidance

Corporate First Amendment Rights and the SEC

Risk Management: Concepts and Guidance

Principles of Guidance and Counselling

Living with Angels: Guidance for Your Soul

Missile Guidance and Control Systems

Evaluating Career Education and Guidance

Respectable Sins, Discussion Guide

Guidance for Industry Sterile Drug Products

Rippling: Meta-Level Guidance for Mathematical Reasoning

Technical Guidance for screening contaminated Sediments

A Guidance Approach for the Encouraging Classroom

Configuration Management: Expert Guidance for IT Service Managers and Practitioners

Assessment of Mental Capacity: Guidance for Doctors and Lawyers

Good Laboratory Practice: OECD Principles and Guidance for Compliance Monitoring

Handbook for good clinical research practice (GCP): guidance for implementation

Handbook for good clinical research practice (GCP): guidance for implementation

Industrial Statistics: Practical Methods and Guidance for Improved Performance

Handbook for Mortals: Guidance for People Facing Serious Illness

Rocky User Guidance

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