Corporate Ethics: How to Stay Out of Jail

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Corporate Ethics How to Stay Out of Jail

• Mike McCarty
• Marty Rayle
• Mike LaFitte
• Steve Rothman
• Joe Ellsworth

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(No Transcript)
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Ripped From Todays Headlines

• Enron
• Worldcom
• Tyco
• Global Crossing
• Martha Stewart
• Consider the market impact of a relatively small
  claim of wrongdoing

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Sources of Influence

• Shareholders
• Directors
• The Market
• Bond Rating Services
• Regulators
• Management

• Customers
• Employees
• Suppliers
• The Community
• NGOs
• Plaintiffs bar

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A Culture of Ethics

• What is the Corporate Culture generally?
• What are the core values?
• What are the real beliefs of employees?
• What is the daily environment?
• How can education, communication, training and
  compliance make or break an effective culture of
  ethics?

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Presenters

• Marty Rayle - Rayle Associates
• Problem Areas and Self Assessment
• Mike LaFitte - Trammell Crow
• How TC has implemented such a culture
• Steve Rothman - Prudential Real Estate
• How we do it at Prudential
• Joe Ellsworth - Pameco
• Final thoughts and wrap-up

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Martha Garriott Rayle, FASIDRayle Associates

• Hey, Whats Going on Here?

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Hey, Whats Going on Here?
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Is It Worse Than Ever?No, Not really
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Is there a Single Culprit? A Root Cause?

• No, not really
• But, there is a convergence of factors
• 1980s shareholder activism demanded CEO
  accountability.
• Linked CEO pay to corporate performancemostly
  through options.
• The era of the Superstar CEO.
• CEOs need to grow earnings to keep share price
  going up to get paid more.
• Temptation to create deceptive transactions to
• Move earnings (usually from the future to the
  present).
• Avoid tax.
• Hide debt. According to Fortunes Geoffrey
  Colvin.
• Voila! The books are cooked

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Leadership is the Key

• The CEO has been implicated in all of the
  scandalized companies.
• Dean Stamoulis of Russell Reynolds, along with
  Hogan Assessment Systems conducted psychological
  profiles of 1,400 managers at large U.S.
  companies.
• One out of 8 (12.5) execs can be termed high
  risk.
• Dont believe rules apply to them.
• Extreme lack of concern for others.
• Rarely possess feelings of guilt.
• Its hard to have an ethical business culture,
  when the boss is a narcissistic, aberrant
  self-promoter, pre-occupied by infectious
  greed.

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Who Are The Good Guys?

• Business Ethics Magazine ranks the 100 Best
  Corporate Citizens
• Evaluated service to 7 equally weighted
  stakeholder groups.
• Average total return to shareholders for 3 years
  (98-02).
• Companies that lost money in 2000 were eliminated.

• Shareholders
• Customers
• Employees
• Minorities and Women

• The Community
• The Environment
• Non-US Stakeholders

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The Good Guys for 2001

• IBM
• Hewlett-Packard
• Fannie Mae
• St. Paul Companies
• Procter Gamble
• Motorola
• Cummins Engine
• Herman Miller

• General Mills
• Avon Products
• Intel
• State Street Corporation
• H.B. Fuller
• Timberland
• Bank of America
• Amgen

Guess who is NOT on the list
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Why Have an Ethics Program?

• Strengthen financial performance.
• Studies in 1988, 1992, 1997, 1999, and 2000
  confirm this.
• Enhance your companys reputation and strengthen
  your brand.
• Recruit the best employees and reduce employee
  turnover.

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Why Have an Ethics Program?Information obtained
from Business for Social Responsibility White
Paper, Business Ethics, 2001-2002

• Avoid law suits, judgments and fines.
• Reduce exposure to activist pressures and
  boycotts.
• Strengthen quality, planning, human resources,
  and production management systems.
• Define, emphasize and reinforce the corporate
  culture.
• And, Do the Right Thing.

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What Should an Ethics Program Contain?And, where
should you start?Information obtained from
Business for Social Responsibility White Paper,
Business Ethics, 2001-2002

• Start at the top.
• Leadership sets the tone by committing to
  integrity.
• Include the Board of Directors.
• Identify and/or renew your company values,
  principles and norms of behavior.
• Incorporate ethics into your corporate mission
  and vision statements.

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What Should an Ethics Program Contain?And, where
should you start?Information obtained from
Business for Social Responsibility White Paper,
Business Ethics, 2001-2002, andThe Ethics
Resource Center, Ethics Toolkit Code
Construction and Content, and Common Ethics
Code Provisions

• Develop a Code of Ethics or Code of Business
  Conduct.
• Enroll a cross section of employees in a
  cross-functional team to develop the code.
• Outline
• Leadership LetterWhy is a code neededand, why
  now?
• IntroductionWhat is the scope of the code?
• Statement of ValuesWhat do you stand for?
• Code Provisions
• Statement of IntentWhat do you want to
  accomplish?
• PrincipleThe fundamental truth, law, doctrine or
  motivating force of the right conduct.
• Guidelines/Rules
• Examples
• Information and Resources

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What Should an Ethics Program Contain?And, where
should you start?Information obtained from
Business for Social Responsibility White Paper,
Business Ethics, 2001-2002, andThe Ethics
Resource Center, Ethics Toolkit Code
Construction and Content, and Common Ethics
Code Provisions

• Typical Code Provisions include
• Employment Practices like harassment, diversity,
  fair treatment of staff, illegal drugs and
  alcohol, use of corporate property, volunteer
  activities, proper exercise of authority.
• Employee, Client and Vendor Information and
  Relationships like privacy and confidentiality,
  disclosure and records maintenance, procurement,
  negotiations, and contracts.
• Conflicts of Interest like gifts, gratuities,
  political activities, outside employment, family
  members, disclosure of financial interests.
• Communications and Information like advertising
  and marketing clarity, access, transparency,
  accuracy and confidentiality of public and
  proprietary information.
• Environmental Practices, like commitment to the
  environment, employee health and safety.

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What Should an Ethics Program Contain?And, where
should you start?Information obtained from
Business for Social Responsibility White Paper,
Business Ethics, 2001-2002, andThe Ethics
Resource Center, Ethics Toolkit Code
Construction and Content, and Common Ethics
Code Provisions

• Provide adequate funding and resources for
  sustained ethics program.
• Distribute the Code widely.
• Develop and deliver comprehensive ethics
  training.
• Create an ethics help/hot line for employees
  anonymous questions and reports.
• Reward and publicize ethical behavior.
• Develop routine audit and evaluation systems for
  compliance.
• Require compatible, coordinated departmental
  programs to complement the corporate program
  (similar to Corporate Strategic Plan).

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Ethics How to Stay Out of JailHow We Do It
at Prudential

• November 18, 2002

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TABLE OF CONTENTS

• Introduction
• Todays Business Environment
• Definition of Ethics
• CRE Organization
• Avoiding the Ethics Problem
• Final Point

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Introduction

• Todays business environment is extraordinarily
  complex. Less staff forces organizations to do
  more with less.
• Earnings growth continues to be core focus.
• Expense reductions continue to be major way
  companies increase EPS.
• CRE continues to be major driver of expense
  reductions.

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Todays Business Environment

• Everyone today is talking about the firms and
  people that misled the financial community and
  investing public.
• Any hint of impropriety has stock market
  ramifications
• Stock market since its peak in March 2000 has
  lost 8.0 trillion in market value.

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Business Communitys Response

• Certification of financial statements by the CEO
  and CFO
• Tougher regulations by Financial Accounting
  Standards Board (FASB)
• This will effect the real estate community by
• Potential tougher rules governing SPVs and SPEs
• Elimination of synthetic leases
• More forms / rules / analysis
• Additional compliance
• Longer / harder to complete transactions

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Governments Response

• Congressional inquiries
• Legal prosecution of individuals and companies
  suspected of wrong doing
• Jail time for individuals convicted

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Earnings Pressure is a constant

• Continued pressure to meet expense targets is a
  disaster waiting to happen without the proper
  programs and controls in place for Corporate Real
  Estate organizations
• Expense pressure and greed could lead CRE staff
  to
• Cut corners
• Violate policy and procedures
• Unethical behavior can result
• Costing companies millions!!!!

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Why are Ethics so important to a CRE organization?

• Transactions
• Aggregate value in millions
• Million of s in Capital
• Property Management operating expense in millions
  annually
• Attempts to pass capital/landlord costs on to
  tenants
• Creates a lot of potential for impropriety

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Definition of Ethics?

• People have been talking about Ethics for a
  long time butwhat is it? And why has it taken on
  such an important role
• A standard definition of Ethics is
• A system of moral principles or values.
• The rules or standards governing the conduct of
  members of a profession.

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Ethics How to avoid the problem

• Why have these types of problems occurred
• Lack of proper controls
• Wall Street pressure to produce Results
• Greed
• Ends Justify Means Attitude

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Ethics in CRE

• CRE organizations are not immune.
• Occupancy expense traditionally represents the
  second or third largest expense after
  salaries/benefits and interest
• There are many opportunities to appear to reduce
  expenses and cut corners if the proper controls
  are not in place.
• Results
• Unethical behavior.
• Or worse.

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Avoiding the Ethics Problems at Prudential

• Sound policies and procedures help contribute to
  sound ethical behavior
• A management style that both leads by example and
  demands ethical behavior
• Safe to say environment endorses ethical
  behavior
• Checks and balances and a system of controls

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Ethics at Prudential

• In the Prudential Financial Real Estate
  Department we have
• Standardized Polices Procedures
• Our system is ISO 9000 certified
• In Lotus Notes data base
• All internal customers can view
• System of Controls
• Corporate Review Guidelines for Approval of
  Projects Payment of Invoices
• Safe to Say environment
• Strong Leadership Team in place

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Ethics at Prudential

• This gives us a competitive advantage
• In market faster
• Quicker response to business needs of corporate
  clients
• Timely and efficient reports to Senior Management
• A Culture of Ethics in an organization breeds
  trust
• Well managed Organization able to effectively
  deal with expense pressures

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How to Avoid the Problem

• ISO 9000 ensures proper polices are in place
• Internal Departmental review ensures compliance
  and self assessment
• Continuous improvement ensures proper changes are
  being made
• Management review informs management of potential
  issues and conflicts
• Audits by Internal audit department ensures
  compliance

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Polices and Procedures

• Sound policies and procedures ensure compliance
• Constantly updated and reviewed
• Staff trained and informed
• Annual review keeps processes and procedures
  fresh and relevant

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ISO 9000 - What is it?

• World-Class Total Quality System
• - System defining all activities of people
  which affect CREs ability to deliver a product
  or service conforming to its customers
  requirements
• - Basis for doing business anywhere in the world
• - Standard of Excellence
• - Recognition by an accredited registrar
• - Certification of ongoing compliance

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ISO 9000

• Three major components
• Continuous Improvement
• Internal Audit
• Management Review
• Compliance reviewed annually by external audit
  firm

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ISO Continuous Improvement Model

• Model

MANAGEMENT REVIEW
INTERNAL AUDIT
CORRECTIVE ACTION
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Ethical Management Style

• Ethical Behavior at the senior level develops a
  trusting and safe environment
• There is no questioning of motives by senior
  management at all levels
• The Good of the client outweighs the Good of
  the self.

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Safe to Say Environment

• Create an environment that the staff feels
  comfortable to voice opinion
• Does not create obstacles to ethical behavior
• Toll free confidential number
• Confidential fax line
• All complaints are investigated
• Action taken if compliant found to be credible

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Discipline

• When Ethical Behavior is compromised, penalties
  include
• Additional Training
• Verbal Written Warnings
• Paid Leave
• Un-Paid Leave
• Termination
• Legal Prosecution

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Checks and Balances

• A system of checks and balances needs to be in
  place to avoid even the appearance of impropriety
• All invoices require a contract or
• Needs exception from departmental VP
• Reasons must be stated
• All invoices require two signatures
• Invoices received and approved by one department
  and reviewed, processed and paid by a different
  department
• Processes and Test Invoices Reviewed periodically
  by internal audit

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Approach - Framework
Management creates an Ethical Environment by
providing the ethical framework and the tools to
enforce the framework thus providing an
self-enforcing ethical working environment
Ethical Behavior
Results
Sound Procedures
All staff has knowledge and easy access ISO
certified
Safe to Say
Environment
Success Depends Upon Trust Integrity
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Conflict of Interests

• Annual questionnaire
• Board affiliations
• Equity investments
• Interest or investments in Prudential Vendors
• Need to update during the year
• Need to report full disclosure

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Final Point

• If you think you are doing something that is of
  questionable ethical behavior
• You probably are..
• So dont do it !!!

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A Culture of Ethics at Trammell Crow

• Michael LaFitte
• Chief Operating Officer
• Trammell Crow Company

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Key Concepts

• How ethics and integrity can co-exist with the
  sometimes paradoxical drive for profit
• How TCCs leadership in ethics and integrity sets
  the tone for individual behavior
• Ethics as a competitive advantage

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Paradox of Operating as a Public Co.

• Pressures
• Wall Street Influence
• Investor expectations
• Earnings growth
• Quarterly pressures
• Exec. Compensation
• Increase in stock, options, warrants
• Economic Cycle
• Cyclical Industry

• Offsetting Controls (that failed)
• Compliance (Enron)
• Disclosure (Worldcom)
• Governance (Tyco)
• Ethics and integrity of participants (Arthur
  Andersen)

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Paradox Compounded By

• Role and importance of analysts
• Conflicts within watchdog community (Accountants
  vs. Consultants)
• Overall decline in ethics and integrity as
  virtues within our culture
• Decline in economy is uncovering hidden problems
  (when tides goes out, you get to see who was
  swimming without trunks on)

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Ethics Integrity Starts at the Top

• Ethics and Integrity cannot be legislated, hard
  to enforce
• Top-down and bottom-up relationship
• Company sets the tone
• Management leads by example
• Staff/People deliver

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TCCs Three Components

• Our Values
• Integrity
• Respect
• Charter
• Customer Services
• Partnership
• Stewardship

• Our Vision
• To be the undisputed leader in the real estate
  services industry
• Our Mission
• Serve
• Focus
• Lead

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TCC Views Ethics and Integrity as Competitive
Advantage

• We believe that ethical business behavior adds
  economic value to a company
• Value increases by earning trust of three main
  constituents
• Investors
• Customers
• Employees

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Execution is Key (Examples)

• Investors
• Code of Disclosure
• Customer Board of Directors
• Strategic Evaluation Teams function as board of
  directors for major accounts
• Employees
• Hiring Start with the right people
• Promotions and compensation Align their
  interests to the right goals
• Ongoing communications Reinforce the concept
  and messages
• Walk the talk

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TCC Action Plans

• TCC Board of Directors
• Internal Audit, Governance, Compensation and
  Executive Committees
• Majority of Directors Independent (5 of 8
  existing Directors)
• External Audits Review
• Internal Policy
• Open Office Environment
• Conflict Resolution Policy
• Community Involvement Charitable Committee (put
  our money where our mouth is)
• HR Policies, Code of Ethics zero tolerance
• Conflict of Interest Policy regarding Real Estate
  Ownership
• Under-promise and Over-Deliver (Customer
  Expectations through the sales process)

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Recognition

• 2002 TCC was recognized as the recipient of the
  Greater Dallas Business Ethics Award
• TCC was recognized as one of the Best 100
  Companies to work for in America

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The Loyalty Effect
SUPERIORCUSTOMERVALUE Operations Process
SurplusCashReinvested
The RightNew Customers
CUSTOMERLOYALTY
SHAREHOLDERLOYALTY
The Right New Employees
The RightNew Investors
EMPLOYEELOYALTYProductivityCost
Advantage Profits
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Measures of Our Success
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Closing

• Good People practice Good Ethics
• Leadership and commitment to Ethical behavior
  starts with Board of Directors and Senior
  Management
• Controls and Policies are required but the
  execution remains the people
• Those who have it will win and be rewarded, those
  who do not will be punished significantly (impact
  on potential MA activity)
• Its All Up to You Trammell Crow Speech , March
  1994

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Closing Thoughts

• Joe Ellsworth
• Pameco

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HAVE WE FALLEN ASLEEP?

• During Class
• same lessons taught before
• At the Wheel
• in charge / managers / managing

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POLICIES PROCEDURES

• CONFLICTS OF INTEREST
• Dollar Amounts
• Nepotism
• Friends
• Company Partners
• NEW MANAGEMENT

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FOLLOW-UP

• Someone in charge of ethics and regulatory
  compliance
• MORAL IMAGINATION
• Theres no honor among thieves

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LET PRINCIPLE, NOT CIRCUMSTANCE, GUIDE YOUR
ACTIONS

• RESPECT
• RESPONSIBILITY
• INTEGRITY
• ?
• WHEN YOUR ACTIONS ALIGN WITH YOUR BELIEFS

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HONOR IS NOT AN OLD FASHIONED WORD IN TODAYS
WORLD!!

• I hope I shall possess firmness and virtue
  enough to maintain what I consider the most
  enviable of all titles the character of an
  honest man.
• George Washington
• Associate yourself with people of good quality
  if you esteem your own reputation, for tis
  better to be alone than in bad company.
• George Washington
• Whenever you are asked to do something, even
  though it can never be known but to yourself, ask
  yourself how you would act if all the world were
  looking at you, and act accordingly.
• Thomas Jefferson
• When a man assumes a public trust, he should
  consider himself public property.
• Thomas Jefferson
• It is the duty of a citizen not only to observe
  the law but to let it be known that he is opposed
  to its violation.
• Calvin Coolidge
• Character consists of what you do on the third
  and fourth tries.
• James A. Michener

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Questions

• Panel