Corporate Ethics and Compliance Programs

Corporate ethics and legal compliance programs are formal programs aimed at managing the ethical and legal conduct of a company's employees. Although companies such as J.C. Penney have had codes of conduct since the early 1900s, the history of more complex ethics and legal compliance programs can be traced to the 1980s and the Defense Industry Initiative on Business Conduct and Ethics (DII). The DII is a consortium of U.S.-based defense industry contractors that subscribes to shared principles and standards of business ethics and conduct (see http://www.dii.org). The DII developed out of the U.S. president's Blue Ribbon Commission on Defense Management that was convened following a number of defense-industry scandals in the early 1980s. The Commission was asked to develop proposals to guide future defense contractor behavior. A number of companies voluntarily joined together to promote ethical business conduct. As of July 2004, 60 companies were DII members, including a number of smaller companies and companies that supply the defense industry. Members agree to live according to the following obligations:

• Adopt a written code of conduct.
• Conduct employees' orientation and training with respect to the code.
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• Provide employees a mechanism to express concerns about corporate compliance with procurement laws and regulations.
• Adopt procedures for voluntary disclosure of violations of federal procurement laws.
• Participate in Best Practices Forums.
• Publish information that shows each signatory's commitment to the above.

The organization hosts a 2-day Best Practices Forum each year, with participation from member organizations and the Department of Defense. It also conducts workshops on specific topics, including yearly 1-day training for ethics/legal compliance professionals, and publishes an annual report to the public and government summarizing DII activities. Information about all these activities can be found on the DII Web site referenced above.

The DII obligations listed above contributed to the development of corporate ethics and compliance programs in these firms because they mandate a number of formal organizational programs, structures, and actions that member companies must undertake to avoid problems such as conflicts of interest and fraudulent time reporting in defense contracting work. For example, companies must have a written code of conduct, they must conduct orientation and training sessions, and they must provide a system for employees to report misconduct or express concerns. Organizations are also required to participate in best practices forums, meaning that they must have personnel who are responsible for managing ethics and legal conduct within the firm.

Shortly after the DII was established, in 1991, the U.S. Sentencing Commission guidelines for organizations were adopted to assess culpability and guide the sentencing of all organizations found guilty of corporate crimes (see http://www.ussc.gov). Since then, many companies have attended to these guidelines in an attempt to avoid serious sanctions that might be brought against the organization in any future legal proceeding. The guidelines were developed based, in part, on the DII principles and the assumption that the organization should not necessarily be held responsible for a single employee's illegal conduct if the court determined that the organization had made a good faith effort to avoid such misconduct on the part of its employees. In the case of conviction and sentencing, sanctions meted out to the organization by the court would be less severe if it found evidence of such good faith efforts to avoid illegal behavior. To provide organizations with some guidance regarding what the court would be looking for, the U.S. Sentencing Commission offered seven guidelines organizations should follow to be dealt with more leniently. These guidelines included features such as assigning responsibility for legal compliance at high organizational levels, development and distribution of conduct standards (e.g., a code of conduct), training on those standards, discipline for misconduct when it occurs, and an advice and reporting system that would catch problem behavior early and deal with it effectively. As a result, many organizations implemented formal ethics or compliance “programs” that included these elements and they assigned high-level personnel (often the legal counsel or someone in that office) to lead the effort.

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