Readings

Legal Basis for Busines Ethics Policies

Four Legal Reasons that a company Should Adopt a Code of Ethics

1. Federal Sentencing Guidelines (applies to all companies) .
2. Caremark Case (applies to all companies) .
3. Sarbanes-Oxley (Code of conduct for financial officers of publicly-traded companies).
4. NASDAQ Rules (code of conduct for all employees of NASDAQ-traded companies).
   

Corporate Crimes - when a corporation is convicted of a crime:

1. Corporation cannot “go to jail”, but can be sentenced to pay a fine.
2. Individual officers, directors, and other employees of corporation can go to jail (or pay fine) - their sentences determined as for other individuals.
   

Federal Sentencing Guidelines ("FSG")

1. The FSG were enacted to bring consistency to criminal sentencing in federal courts across the United States.
2. The FSG require minimum sentences for corporations and individuals.
3. The FSG requires that the judge examine certain criteria for determining enhancements or reductions to sentences.
4. The sentence (that is the fine and/or jail term) can be reduced if:

• the corporation has an effective ethics program in place (includes a written policy, regular training, way to report, a person designated as in charge of ethics, consistent follow up on reports).
• AND the Officers and directors of the company could not have reasonably known about the crime.
  

Caremark Case - (from the Delaware courts)

1. If a corporation is found guilty of a crime and must pay a fine, the shareholders are allowed to sue the invididual officers and directors of the corporation to require those individuals to pay back the fine to the corporation.
2. The officers and directors will have a valid defense (that is, they will not be liable) if they had an effective ethics program in place and they could not have reasonably known about the criminal wrongdoing.
   

Sarbanes-Oxley Act of 2002 (“SOX”)

1. Reformed governance, accountability, and enforcement for corporate wrong-doing.
2. Applies to companies publicly traded in the US. and requires (among other things):

• the appointment of an Audit Committee from the Board of Directors to oversee the financial reporting of the company.
• the corporation must have a written Code of Ethics for senior financial officers.
• the CEO and the CFO must certify the accuracy of the financials and the financial-process controls

NASDAQ Rules

1. Requires all NASDAQ-traded companies to establish publicly available code of conduct for ALL employees and directors
   Effective May 2004.

Best Practices for Drafting a Busines Ethics Policy:

1. Start with the core values for the company (this is different than the mission statement). The core values depend upon the industry and the focus of the company.
2. Within each core value, make a statement about how that core value is applied to each of the four key stakeholder relationships:
   1. quality of the workplace (relationship with co-workers)
   2. relationship with customers
   3. respect for company property (relationship with the shareholders / owners)
   4. promoting a positive image and serving the public interest (relationship with public)
3. Then give examples of applications to frequently encountered situations.

Examples of Business Ethics Programs for technology companies that meet the best practices outlined above:

BellSouth, Atlanta, Georgia (available at: http://ethics.bellsouth.com/).

Cisco Systems, San Jose, California (available at: http://www.cisco.com/web/about/ac227/ac111/index.html).

Hewlett-Packard Company, Palo Alto, California (available at http://www.hp.com/hpinfo/globalcitizenship/). Please note, that a good ethics program will not guarantee ethical behaviour on the part of the leadership.