Business Ethics:
A New Style of Management
and Investment
Professor David M. Chen
003924@mail.fju.edu.tw
Graduate Institute of Finance
Fu Jen Catholic University
Spring 2009
Purposes
To appreciate the essential of Business
Ethics through five main faucets
1. Recognizing socially acceptable business
conduct from the global perspectives
2. Embedding good business in treating people
nice and fair
3. Reengineering corporate image
4. Enhancing professional ethics
5. Investing in sustainable and socially
responsible corporations
Various global initiatives in areas related to
corporate social responsibility (CSR) and their
respective implementation guidance form the core of
course materials.
Case: Social, Environmental and Related Reporting
of Inditex Group, 2006
The course will be held in English
Students are expected to communicate and
present case studies or research reports in
English (19 in total).
English proficiency is emphasized as another main
product of the course.
Content
1. Business Ethics as a Field of Study
 Code of Ethics (Guardsmark-ethics06)
 Code of Conduct (PwC-conduct05)
2. Caux Round Table Principles for Business
 Nissan’s Approach to CSR (Nissan’sApproachCSR)
3. Ethics Resource Center
 National Business Ethics Survey 2005 (NBES-05)
 Critical Elements of Organization Ethical Culture 2006
(ERC-OrgEthicalCuture06)
4. Environmental Management Systems
 ISO 14000
 RoHS
5. Working environment
 SA8000
 The Switcher-Prem Group Experience in India
(SwitcherPremIndia-02)
 SA8000: Tool to Improve Quality of Life
(ToolImporveQualityLife-02)
6. Business Principles for Countering Bribery
 Transparency International
(CorruptionPerceptionsIndex-06,
GlobalCorruptionBarometer-06, BribePayersIndex-06)
 (ICC-CombatBribery)
7. NYSE/NASD IPO Advisory Committee
 NYSE Hearing (StockRatingResearchConflict,
GuaranteedRepurchase, PriceInfluencing)
 Enron
 SEC report (SEC-Enron-02)
 TIAA CREF testimony (TIAA-CREF-Enron-02)
8. Policy for Managing Conflicts of Interest in
Relation to Investment Research
 Morgan Stanley
 Investment research report disclosure requirements
(GoldmanSach-Huandian)
9. Dow Jones Sustainable Index
 (NewInvestmentStyle)
 World Resources Institute (ChangingDrivers,
Oil&Gas)
10. Socially responsible investing (SRI)
 Ethical Banking
 Microcredit
11. Code of conduct for credit rating agency
 (IOSCOCRA)
Business Ethics as a Field
Case
A newly hired salesman on training
His trainer is used to making up the
differences in restaurant and golf bills for
procurement agents (common courtesy?).
• Being asked to add the extra expenses to cost of
other items since no line on the form for this (yet
the numbers don’t add up)*.
• Learned the differences between working
directly with the federal government
procurement agents and the companies with
which his firm subcontracted (relay information).
Regulation
The Procurement Integrity Section of the
Office of Federal Procurement Policy Act
and the Federal Acquisition Regulation
• Section 27(a)(2) forbidding agents to “offer, give,
or promise to offer or give, directly or indirectly,
any money, gratuity, or other thing of value to
any procurement officials of such agency; or (3)
solicit or obtain, directly or indirectly, from any
officer or employee of such agency, prior to the
award of a contract any proprietary or source
selection information regarding such
procurement.”*
Certificate of Procurement Integrity signed
by procurement agents
Recognize & deal with complex issues
Public outrage about deception and fraud
Enron, WorldCom, Arthur Andersen, Tyco
• A crisis of confidence and trust: accounting
fraud, insider trading, falsifying documents,
deceptive advertising, defective products,
bribery, & employee theft.
• Integrate business ethics and corporate
responsibility into all business decisions.
Business ethics
Deals with questions about whether specific
business practices are acceptable.
• Should a salesperson omit facts about a
product’s poor safety record?
• Should an accountant report inaccuracy
discovered in an audit?
By its nature, the field of business ethics is
controversial and there is no universally
accepted approach for resolving its issues.
• The goal is to help one understand and use one’s
current values and convictions when making
business decisions so that you think about the
effects of those decisions on business and
society.*
• Neither to moralize by telling you what is right
or wrong on specific situation, nor to prescribe
any one philosophy or process as best or most
ethical.
• Focus on how organizational ethical decisions
are made and on ways companies can improve
their ethical conduct.
Definition
Ethics
Tayor
• An inquiry into nature and grounds of morality
where the term morality is taken to mean moral
judgments, standards and rules of conduct.*
The American Heritage Dictionary
• The study of the general nature of morals and of
specific moral choices; moral philosophy; and
the rules or standards governing the conduct of
the members of a profession.
Distinction from ordinary decisions
• Alderson: Lies in “the point where the accepted
rules no longer serve, and the decision maker is
faced with the responsibility for weighing values
and reaching a judgment in a situation which is
not quite the same as before.”
• The amount of emphasis decision makers place
on their own values relative to accepted
practices within their company.
Business ethics
Comprises the principles and standards that
guide behavior in the world of business.
• Profit not realized through misconduct.
• Balance the desires for profits against the needs
and desires of society.
• Right or wrong, ethical or unethical, is often
determined by investors, employees, customers,
interest groups, the legal system, and the
community (they are not necessarily “right”, but
their judgments influence society’s acceptance).
• Hence, it is important to understand business
ethics and recognize ethical issues.
Reasons for studying
Business ethics is not merely an extension of
an individual’s own personal ethics.
• An individual’s personal values and moral
philosophies are only one factor in the ethical
decision-making process.
• Normally a business does not establish rules or
policies on personal ethical issues such as sex
and the use of alcohol outside the workplace
(may even be illegal).
• Only when a person’s preferences or values
influence job performance do an individual’s
ethics play a major role.
• A high level of personal moral development may
not prevent an individual from violating the law
in a complicated organizational context.*
• E.g., there is considerable debate over what
constitute antitrust, deceptive advertising, and
violation of Foreign Corrupt Practices Act, even
experienced lawyers debate the exact meaning.*
• Because organizations are culturally diverse and
personal values must be respected, ensuring
collective agreement on organizational ethics is
as vital as any other effort.
• Many business ethics decisions are close calls.
• Studying business ethics will help to identify
ethical issues when they arise and recognize the
approaches available for resolving them.
• Learn more about the ethical decision-making
process and about ways to promote ethical
behavior within the organization.
• Begin to understand how to cope with conflicts
between personal values and those of the
organization.
Development
 Before 1960
The 1920s
• The Progressive Movement attempted to provide
citizens with a “living wage,” defined as income
sufficient for education, recreation, health, and
retirement.*
• Businesses were asked to check unwarranted
price increases and any other practices that
would hurt a family’s “living wage.”
The 1930s
• Came the New Deal which specifically blamed
business for the country’s economic woes.
• Business was asked to work more closely with
the government to raise family income.
• Check whether you can rent the movie “The
Reds” from any store or buy it.
The 1950s
• The New Deal had evolved into the Fair Deal by
Harry S. Truman.
• This program defined such matters as civil rights
and environmental responsibility as ethical
issues that businesses had to address.
Overall
• Ethical issues related to business were often
discussed within the domain of theology or
philosophy.
• Religious leaders raised questions about fair
wages, labor practices, and the morality of
capitalism.
• Catholic colleges and universities began to offer
courses in social ethics.
• Each religion applied its moral concepts not only
to business but also to government, politics, the
family, personal life, and all other aspects of life.
The 1960s
American society turned to causes.
• An antibusiness attitude developed as many
critics attacked the so called military-industrial
complex.
• The decay of inner cities and the growth of
ecological problems such as pollution and the
disposal of toxic and nuclear wastes.
• The rise of consumerism (Consumers’ Bill of
Rights): John F. Kennedy delivered a “Special
Message on Protecting the Consumer Interest,”
which outlined four basic consumer rights:
safety, informed, choose, and to be heard.
• Ralph Nader’s Unsafe at Any Speed, 1965,
which criticized the auto industry as a whole,
and GM in particular, for putting profit and style
ahead of lives and safety.
• Consumer activist also helped secure the passage
of several consumer protection laws, such as the
Wholesome Meat Act of 1967, the Radiation
Control for Health and Safety Act of 1968, the
Clean Water Act of 1972,* and the Toxic
Substance Act of 1976.
• Lyndon B. Johnson and the Great Society
(national capitalism): the U.S. government’s
responsibility was to provide the citizen with
some degree of economic stability, equality, and
social justice. Activities that could destabilize
the economy or discriminate against any class of
citizens began to be viewed as unethical and
unlawful.
The 1970s
Business ethics began to develop as a field
of study.
• Business professors began to teach and write
about corporate social responsibility:
organization’s obligation to maximize its
positive impact on stakeholders and to minimize
its negative impact.
• Philosophers applied ethical theory and
philosophical analysis to structure the discipline
of business ethics.
• Companies became more concerned with their
public images.
• The Nixon administration’s Watergate scandal
focused public interest on the importance of
ethics in government.
• The Foreign Corrupt Practices Act was passed
during Jimmy Carter’s administration: illegal for
U.S. businesses to bribe government officials of
other countries.*
• A number of major ethical issues had emerged,
such as bribery, deceptive advertising, price
collusion, product safety, and the environment.
The 1980s
Business ethics acknowledged as a field of
study.
• Business ethics organizations grew to include
thousands of members.
• Many of leading companies established ethics
and social policy committees.
• The Defense Industry Initiative on Business
Ethics and Conduct (DII)** was developed to
guide corporate support for ethical conduct (18
defense contractors drafted principles in 1986).
Six principles
1. DII supports codes of conduct and their
widespread distribution. Must be
understandable and provide details on more
substantive areas.
2. Member companies (50) are expected to
provide ethics training for their employees
as well as continuous support between
training periods.
3. Defense contractors must create an open
atmosphere in which employees feel
comfortable reporting violations without
fear of retribution.
4. Companies need to perform extensive
internal audits and develop effective internal
reporting and voluntary disclosure plans.
5. DII insists that member companies preserve
the integrity of the defense industry.
6. Member companies must adopt a
philosophy of public accountability.
 Reagan/Bush eras
• Self-regulation, rather than regulation by
government, was in the public’s interest.
• Many tariffs and trade barriers were lifted,
and business merged and divested within an
increasingly global atmosphere.
• Corporations that once were nationally
based began operating internationally and
found themselves mired in value structures
where accepted rules of business behavior
no longer applied.
The 1990s
Bill Clinton continued to support selfregulation and free trade.
• Unprecedented government action to deal
with health-related social issues such as
teenage smoking (restricting cigarette
advertising, banning vending machine sales,
and ending the use of cigarette logos in
connection with sports events).
• SEC Chairman Arthur Levitt unsuccessfully
pushed for many reforms that could have
prevented the accounting ethics scandals.
Federal Sentencing Guidelines for
Organizations*
• FSGO approved by Congress in Nov. 91.
• Based on the six principles of the DII.
• Codifying into law incentives to reward
organizations for taking action to prevent
misconduct, such as developing effective
internal legal and ethical compliance
programs.
• Mitigate penalties for businesses that strive
to root out misconduct and establish high
ethical and legal standards.
• If a company lacks an effective ethical
compliance program and its employees
violate the law, it can incur severe penalties
(carrot-and-stick).
• Focus on firms taking action to prevent and
detect business misconduct in cooperation
with government regulation.*
• A mechanical approach using legislative
logic will not suffice to avert serious
penalties. Must develop corporate value,
enforces its code of ethics, and strive to
prevent misconduct.
The twenty-first century
Falsifying financial reports and reaping
questionable benefits had become part of the
culture of many companies.
• Dennis Kozlowski, former CEO of Tyco, was
indicted on 38 counts of misappropriating
$170m of Tyco funds and netting $430m from
improper sales of stock.
– Allegedly used the funds to purchase many
personal luxuries, including a $15m vintage
yacht and a $3.9m Renoir painting and to
throw a $2m party for his wife’s birthday.
• Arthur Andersen was convicted of obstructing
justice after shredding documents related to its
role as Enron’s auditor.
– Also faced questions surrounding its audits
of other companies that were charged with
employing questionable accounting practices,
including Halliburton, WorldCom, Global
Crossing, Dynegy, Qwest, and Sunbeam.
Congress passed the Sarbanes-Oxley Act
• in 2002, the most far-reaching change in
organizational control and accounting
regulations since the Securities and Exchange
Act of 1934.
• Made securities fraud a criminal offense and
stiffened penalties for corporate fraud.
• Created an accounting oversight board that
requires corporations to establish codes of ethics
for financial reporting and to develop greater
transparency in financial reports to investors and
other interested parties.
• Requires top executives to sign off on financial
reports (risk fines and long jail sentences if
misrepresented).
• Requires executives to disclose stock sales
immediately and prohibits companies from
giving loans to top managers.
Current trend
• From legally based ethical initiatives to cultural
or integrity-based initiatives that make ethics a
part of core organizational values.*
• NYSE requires all member companies to have
code of ethics.
• Many firms now have ethics officers, and some
firms, including UPS, Raytheon, and Baxter
International, take ethics seriously enough to
have their ethic officers report directly to senior
management or boards of directors.
• The growth of the Ethic Officer Association
(EOA) to 850 members, representing 420
companies, highlights the increasing importance
of this position (considering launching an ethics
certification program).
Global development
• Businesses are working more closely together to
establish standards of acceptable behavior.
• Some companies will not do business with
organizations that do not support and abide by
these standards.
• The Caux Round Table is a group of businesses,
political leaders, and concerned interest groups
that desire responsible behavior in the global
community.
Benefits
Building an ethical reputation among
employees, customers, and the general
public pays off.
Increased efficiency in daily operation,
greater employee commitment, increased
investor willingness to entrust funds,
improved customer trust and satisfaction,
and better financial performance.*
• Many believe a particular course of action is
simply the right thing to do as a responsible
member of society (feeling good is also a good
business).
Employee commitment
• Comes from employees who believe their future
is tied to that of the organization and their
willingness to make personal sacrifices for it.
• Safe work environment, competitive salaries,
and the fulfillment of all contractual obligations
toward employees.
• Work-family programs and stock ownership
plans to community service.*
• Productivity and teamwork: share a common
vision of trust within and between departments;
make individuals more willing to rely and act on
the decisions and actions of their coworkers.
• Trusting relationships (honesty and respect)
contribute to greater decision-making
efficiencies.
Investor loyalty
• Social responsible mutual funds and asset
management firms.
• Investors recognize that an ethical climate
provides a foundation for efficiency, productivity,
and profits. Negative publicity, lawsuits, and
fines can lower stock prices, diminish customer
loyalty, and threaten a company’s long-term
viability.*
Customer satisfaction
• Almost 60% of people focus on social
responsibility ahead of brand reputation or
financial factors when forming impressions of
companies (boycott the company).
• May avoid the products of companies that are
perceived as treating their employees unfairly
(sweatshop and abuses in subcontracting, SA
8000 industry code of conduct).
• When an organization has a strong ethical
environment, it usually focuses on the core value
of placing customers’ interest first.
• Companies convicted of misconduct (failure to
act responsibly toward various stakeholders)
experience a significantly lower return on assets
and on sales.
Ethics Resource Center, ERC (reading)
www.ethics.org
National Business Ethics Survey, NBES
• "Ethics and compliance programs can and do
make a difference. However, their impact is
related to the culture in which they are situated."
2005 NBES Summary
Misconduct: any behavior that violates the
law or organizational ethics standards.
• 21% observed abusive or intimidating behavior
towards employees.
• 19% observed lying to employees, customers,
vendors, or the public.
• 18% observed a situation that places employee
interests over organizational interests.
• 16% observed violations of safety regulations.
• 16% observed misreporting of actual time
worked.
• 12% observed discrimination on the basis of
race, color, gender, age or similar categories.
• 11% observed stealing or theft.
• 9% observed sexual harassment.
The six elements of a formal ethics and
compliance program are based upon
suggestion by the FSGO
1.Written standards of conduct
2.Training on ethics
3.Mechanisms to seek ethics advice or information
4.Means to report misconduct anonymously
5.Discipline of employees who violate ethical
standards
6.Evaluation of employees performance based on
ethical conduct
 The NBES defines risk factors as:
1. Employee's exposure to circumstances that
invite misconduct.
2. Employee's recognition of those situations as
misconduct.
3. Pressure to compromise the standards of the
organization.
4. Preparedness of employees to respond to these
situations.
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www.workingvalues.com
www.complianceweek.com
www.ama-assn.org
www.aacsb.edu
Every Guardsmark crest (reading)
is emblazoned with our company core
values: Truth, Courage, & Judgment.
Our business success and ethical
commitment are indivisible.
• Guardsmark was founded on the pillars of
quality, excellence, diversity, opportunity, and
doing the right thing; from day one, we wanted
to work with individuals who had intellect, work
ethic, and honesty.
• Every single member of our organization—from
the security officer to the corporate executive—
is committed to demonstrating our values and
principles at all times.
• Through our Code of Ethics, the people of
Guardsmark pledge to work always “to
strengthen our weaknesses and build on our
strengths” and to “lead by example.”
The Guardsmark Code of Ethics
• All Guardsmark employees subscribe to our
comprehensive Code of Ethics, which is a
product of top-down commitment and bottom-up
involvement. First developed in 1980, this living
document is revised annually by the entire
workforce.
• The Code sets impeccable standards of behavior
for employee conduct across:
» Employee relations
» Our commitment to excellence
» Professionalism in the industry
» Employee wellness
» Vendor relations
» Community and government relations
» Industry commitment
» Information technology
Ensuring understanding by employees,
visitors and vendors
• Our code appears in our employment application,
where it must be signed by every applicant. It is
always available to our employees as a standalone document and promoted in:
» Our orientation handbook
» Periodic educational publications
» Employee manuals
» Placards in all offices
• To make the principles of this important
document accessible to each Guardsmark team
member, Guardsmark maintains an ethics
committee and a dedicated ethics officer who
can be reached through a toll-free number. We
take every ethics concern or issue seriously and
provide assistance about applying principles to
any given situation.
Understand our ethical foundation
• A true understanding of Guardsmark's
commitment can only come from reviewing our
Code of Ethics in its entirety.
• Guardsmark exceeds the requirements of the
Sarbanes-Oxley Act of 2002 that mandates the
disclosure by public companies of whether they
have adopted written codes of ethics to deter
wrongdoing and to promote honest and ethical
conduct.
• Although a private company such as
Guardsmark is not subject to the requirements of
this bill, the organization publicly releases its
Code of Ethics, which was established in 1980
and is rewritten annually with input from its
employees and applies to all team members,
without exception.
• www.guardsmark.com
PricewaterhouseCoopers (reading)
is one of the world’s pre-eminent
professional services organisations.
As professional advisers we help our clients
solve complex business problems and aim to
enhance their ability to build value, manage
risk and improve performance.
• As business advisors we play a significant role
in the operation of the world’s capital markets.
• We take pride in the fact that our services add
value by helping to improve transparency, trust
and consistency of business processes.
• In order to succeed, we must grow and develop,
both as individuals and as a business.
• Our core values of Excellence, Teamwork and
Leadership help us to achieve this growth.
• As a result, we also have a Code of Conduct for
all PwC people and firms.
• This Code is based on our values and it takes
them to the next level - demonstrating our values
in action.
• The Code also provides a frame of reference for
PwC firms to establish more specific
supplements to address territorial issues.
• www.pwc.com
Ethics Statements
One of BellSouth's greatest assets is
our reputation.
One of the key factors that contribute to
our reputation and good name is our
long-standing tradition of ethics -- a
tradition which has built solid trust
between us and our customers, our
employees, our shareholders, and our
communities.
As we work to maximize shareholder value,
we will not waver in maintaining our
tradition of ethics.
• BellSouth's ethical culture is rooted in our
values. It is these values that guide our actions
and relationships with each other, with our
customers, and with our investors.
• While our values describe who we are and what
we are about, it is our actions that make these
values meaningful. Every action we take shapes
the ethical character of BellSouth. That character
is at the heart of our reputation and ultimately
sets us apart in the marketplace.
• We understand each individual employee's
actions contribute to the trust we have
earned. We offer our employees a variety of
resources to help them make ethical decisions
and maintain the highest level of integrity.
• BellSouth's Office of Ethics & Compliance is
available to answer questions concerning ethics,
or take reports of possible ethical violations.
• Employees and other concerned individuals can
contact Ethics by completing this online form or
by calling the Ethicsline at 1-800-664-4231.
• Both these methods are available 24 hours a day,
7 days a week You may remain anonymous if
you prefer, but this sometimes limits the
investigation due to insufficient information.
• www.ethics.bellsouth.com
Texas Instruments
Employees placed their personal imprint
on the ethics of the company, more than
60 years ago.
They chose to conduct themselves to the
highest standards of personal integrity, and
they demanded the same of others.
• Today, those principles and values still permeate
all of TI's actions and decisions.
• As TI grew, management recognized a need to
formalize and communicate company standards.
• In 1961, TI published its first written code of
ethics, a booklet titled "Ethics in the Business of
TI."
• Though it has been revised several times to
reflect changes in the business environment, the
basic message contained in that first booklet has
never changed, nor has TI's emphasis on
maintaining a track record of ethics and integrity.
• About 20 years ago, an increasing number of
difficult issues, challenges and close calls in
modern business were recognized, but clear
choices of action did not always exist.
• Employees and their business associates needed
to better understand TI's expectations and where
they could go for help if they had a question or a
concern.
• TI believes maintaining the highest ethical
standards requires a partnership between
employees and employers.
• The employer proactively supports employees
by communicating values and giving individual
guidance, while empowered employees
participate actively in problem-solving.
• In 1987, TI decided to actively support
employees by establishing a TI Ethics Office and
appointing a TI Ethics Director.
• The TI Ethics Office has three primary functions:
» Ensure that business policies and practices
continue to be aligned with ethical principles;
» Clearly communicate ethical expectations; &
» Provide multiple channels for feedback
through which people can ask questions,
voice concerns and seek resolution to ethical
issues.
• A reputation and track record for ethics and
integrity is vital for establishing the trust that is
the basis for all successful business relationships.
All people associated with TI—employees,
customers, suppliers, governments and
communities—need to understand and
appreciate the importance of these principles.
• TI has strong documented requirements for
ethical business practices:
» TI Standard Policies and Procedures
» The TI Commitment
» "The Values and Ethics of TI" booklet
• The direction is clear, and the message is firmly
and credibly supported by our highest levels of
management and by our Board of Directors.
• www.ti.com
HCA announced the development
of the Ethics, Compliance and Corporate
Responsibility Department in Oct. 1997.
Alan Yuspeh was named Senior Vice
President for Ethics, Compliance and
Corporate Responsibility.
• The department oversees the development and
implementation of a comprehensive corporate
Ethics and Compliance Program.
1.Articulating standards of compliance and
ethical conduct through a Code of Conduct and a
series of company Policies and Procedures.
2.Creating awareness of these standards among
everyone in the company through high quality
ethics training, compliance training, and other
ongoing communication efforts.
3. Providing a means to report exceptions (i.e.,
possible misconduct). We maintain an Ethics
Line (1-800-455-1996) to receive reports from
anyone who is aware of a violation of our Code
of Conduct or Policies and Procedures. This
line is answered at all times.
4. Monitoring and auditing performance in areas
of compliance risk to ensure that established
policies and procedures are being followed and
are effective.
5. Establishing organizational supports, including
necessary committees, responsible executives
and facility ethics and compliance officers, for
this entire effort.
6. Overseeing implementation of and adherence
to a Corporate Integrity Agreement.*
7. And undertaking other efforts, such as clinical
ethics and pastoral care services.
hcahealthcare.com
Starbucks: It’s the way we do business
Contributing positively to our
communities and environment is so
important
that it’s a guiding principle of our mission
statement.
• We jointly fulfill this commitment with partners
(employees), at all levels of the company, by
getting involved together to help build stronger
communities and conserve natural resources.
In our communities Starbucks has many
community building programs
• that help us be good neighbors and contribute
positively to the communities where our partners
(employees) and customers live, work and play.
• We encourage and reward volunteerism and
participation in organizations that are important
to our partners, including local schools, literacy
programs, walk-a-thons and Earth Day activities.
Environmental Affairs
• Starbucks integrates policies and programs
throughout all aspects of operations to minimize
our environmental impact.
• From promoting conservation in coffee growing
countries to recycling, Starbucks is committed to
contributing positively to the environment.
Supplier Diversity
• By working with qualified diverse suppliers,
Starbucks has regularly met and exceeded its
goals for purchases with women and minorityowned suppliers. Embracing diversity is our
foundation for providing a world-class supplier
program that supports our Mission Statement.
Mission Statement
Establish Starbucks as the premier purveyor
of the finest coffee in the world while
maintaining our uncompromising principles
while we grow. Six guiding principles:
1.Provide a great work environment and treat each
other with respect and dignity.
2.Embrace diversity as an essential component in
the way we do business.
3.Apply the highest standards of excellence to the
purchasing, roasting and fresh delivery of our
coffee.
4.Develop enthusiastically satisfied customers all
of the time.
5.Contribute positively to our communities and
our environment.
6.Recognize that profitability is essential to our
future success.
Committed to a role of environmental
leadership in all facets of our business.
1.Understanding of environmental issues and
sharing information with our partners.
2.Developing innovative and flexible solutions to
bring about change.
3.Striving to buy, sell and use environmentally
friendly products.
4.Recognizing that fiscal responsibility is essential
to our environmental future.
5.Instilling environmental responsibility as a
corporate value.
6.Measuring and monitoring our progress for each
project.
7.Encouraging all partners to share in our mission.
www.starbucks.com
The Caux Round Table Business
Principles of Ethics
Introduction
CRT principles are rooted in two basic
ethical ideals: kyosei and human dignity.
The Japanese concept of kyosei means
• living & working together for the common good
enabling cooperation and mutual prosperity to
coexist with healthy and fair competition.
• “Human dignity” refers to the sacredness or
value of each person as an end, not simply as a
mean to the fulfillment of others' purposes or
even majority prescription.
• The document owes a substantial debt to The
Minnesota Principles, a statement of business
behavior developed by the Minnesota Center for
Corporate Responsibility. The Center hosted and
chaired the drafting committee, which included
Japanese, European, and United States
representatives.
• CRT principles offer a foundation for dialogue
and action for business leaders worldwide and
affirm the necessity for moral values in business
decision-making. Without moral values, stable
business relationships and a sustainable world
community are impossible.
Competitors
Suppliers
Responsibilities
Communities
Economic &
social impact
Owner/investors
Employees
CRT Business
Principles of Ethics
Business behavior
Respect for rules
Customers
Avoidance of
illicit operations
Respect for the
environment
Support for
multilateral trade
Principle 1. The responsibilities
Beyond shareholders toward stakeholders
• The value of a business to society is the wealth and
employment it creates and the marketable products
and services it provides to consumers at a reasonable
price commensurate with quality.
• To create such value, a business must maintain its
own economic health and viability, but survival is
not a sufficient goal.
• Businesses have a role to play in improving the lives
of all their customers, employees, and shareholders
by sharing with them the wealth they have created.
• Suppliers and competitors as well should expect
businesses to honor their obligations in a spirit of
honesty and fairness.
• As responsible citizens of local, national, regional,
and global communities in which they operate,
businesses share a part in shaping the future of those
communities.
Principle 2. The economic and social impact
Toward innovation, justice, and world
community
• Businesses established in foreign countries to
develop, produce, or sell should also contribute to
the social advancement of those countries by
creating productive employment and helping to raise
the purchasing power of their citizen.
• Businesses also should contribute to human rights,
education, welfare, and vitalization of the countries
in which they operate.
• Businesses should contribute to economic and social
development not only in the countries in which they
operate, but also in the world community at large,
through effective and prudent use of resources, free
and fair competition, and emphasis upon innovation
in technology, production methods, marketing, and
communications.
Principle 3. Business behavior
Beyond the letter of law toward a spirit of trust
• Accepting the legitimacy of trade secrets, businesses
should recognize that sincerity, candor, truthfulness,
the keeping of promises, and transparency
contribute not only to their own credibility and
stability but also to the smoothness and efficiency of
business transactions, particularly on the
international level.
Principle 4. Respect for rules
To avoid trade friction
• and to promote free trade, equal conditions for
competition, and fair and equitable treatment for all
participants, business should respect international
and domestic rules.
• In addition, they should recognize that some
behavior, although legal, may still have adverse
consequences.
Principle 5. Support for multilateral trade
Should support the multilateral trade systems
• of the GATT/World Trade Organization and similar
international agreements.
• They should cooperate in efforts to promote the
progressive and judicious liberalization of trade, and
to relax those domestic measures that unreasonably
hinder global commerce, while giving due respect to
national policy objectives.
Principle 6. Respect for the environment
Should protect and, where possible,
• improve the environment, promote sustainable
development, and prevent the wasteful use of natural
resources.
Principle 7. Avoidance of illicit operations
Should not participate in or condone bribery,
• money laundering, or other corrupt practices; indeed,
should seek cooperation with others to eliminate them.
• Should not trade in arms or other materials used for
terrorist activities, drug traffic, or other organized
crime.
Principle 8. Customers
We believe in treating all customers with dignity
• irrespective of whether they purchase our products
and services directly from us or otherwise acquire
them in the market.
We therefore have a responsibility to
• provide our customers with the highest quality
products and services consistent with their
requirements;
• treat our customers fairly in all aspects of our
business transactions, including a high level of
service and remedies for their dissatisfaction;
• make every effort to ensure that the health and
safety of our customers, as well as the quality of
their environment, will be sustained or enhanced by
our products and services;
• assure respect for human dignity in products offered,
marketing, and advertising; and
• respect the dignity of the culture of our customers.
Principle 9. Employees
We believe in the dignity of every employee
• and in taking employee interest seriously.
We therefore have a responsibility to
• provide jobs and compensation that improve
workers’ living conditions;
• provide working conditions that respect each
employee’s health and dignity;
• be honest in communications with employees and
open in sharing information, limited only by legal
and competitive restrains;
• listen to and, where possible, act on employee
suggestions, ideas, requests, and complains;
• engage in good faith negotiations when conflict
arises;
• avoid discriminatory practices and guarantee equal
treatment and opportunity in areas such as gender,
age, race, and religion;
• promote in the business itself the employment of
differently abled people in places of work where
they can be genuinely useful;
• protect employees from avoidable injury and illness
in the workplace;
• encourage and assist employees in developing
relevant and transferable skills and knowledge; and
• be sensitive to serious unemployment problems
frequently associated with business decisions, and
work with governments, employee groups, other
agencies and each other in addressing these
dislocations.
Principle 10. Owners/investors
We believe in honoring the trust
• our investors place in us.
We therefore have a responsibility to
• apply professional and diligent management in order
to secure a fair and competitive return on our
owners’ investment;
• conserve, protect, and increase the owners/investors’
assets;
• disclose relevant information to owners/investors
subject only to legal requirements and competitive
constrains; and
• respect owners/investors’ requests, suggestions,
complains, and formal resolutions.
Principle 11. Suppliers
Our relationship with suppliers
• and subcontractors must be based on mutual respect.
We therefore have a responsibility to
• seek fairness and truthfulness in all of our activities,
including pricing, licensing, and rights to sell;
• ensure that our business activities are free from
coercion and unnecessary litigation;
• foster long-term stability in the supplier relationship
in return for value, quality, competitiveness, and
reliability;
• share information with suppliers and integrate them
into our planning processes;
• pay suppliers on time and in accordance with agreed
terms of trade; and
• seek, encourage, and prefer suppliers and
subcontractors whose employment practices respect
human dignity.
Principle 12. Competitors
We believe that fair economic competition
• is one of the basic requirement for increasing the
wealth of nations and, ultimately, for making
possible the just distribution of goods and services.
We therefore have a responsibility to
• foster open markets for trade and investments;
• promote competitive behavior and demonstrates
mutual respect among competitors;
• refrain from either seeking or participating in
questionable payments of favors to secure
competitive advantages;
• respect both tangible and intellectual property rights;
and
• refuse to acquire commercial information by
dishonest or unethical means, such as industrial
espionage.
Principle 13. Communities
We believe that as global corporate
citizens,
• we can contribute to such forces of reform and
human rights as are at work in the communities in
which we operate.
We therefore have a responsibility to
• respect human rights and democratic institutions,
and promote them wherever practicable;
• recognize government’s legitimate obligation to the
society at large and support public policies and
practices that promote human development through
harmonious relations between business and other
segments of society;
• collaborate with those forces in the community
dedicated to raising standards of health, education,
workplace safety, and economic well-being;
• promote and stimulate sustainable development and
play a leading role in preserving and enhancing the
physical environment and conserving the earth’s
resources;
• support peace, security, diversity, and social
integration;
• respect the integrity of local culture; and
• be a good corporate citizen through charitable
donations, educational and cultural contributions,
and employee participation in community and civic
affairs.
ISO 14000
What is it?
International Organization for
Standardization (ISO)
ISO 9000 series
• International standards dealing with quality
management systems.
ISO 14000 series
• Environmental management systems.
• Finalized in September 1996.
• The key to a successful ISO 14001 EMS is
having documented procedures that are
implemented, maintained, monitored, reviewed,
and corrected.
• Specifies requirements for establishing an
environmental policy, determining
environmental aspects & impacts of
products/activities/services, planning
environmental objectives & measurable targets,
implementation & operation of programs to meet
objectives & targets, checking & corrective
action, and management review.
Why is the concern?
May become a contractual requirement of
customers in both the U.S. and the EC.
• It is a continuation of the ISO-9000, may
eventually become a requirement for obtaining
ISO-9001 recertification.
• It is a logical next step because it is very similar
to ISO-9001 and the principles of TQM.
• The U.S. EPA may provide incentives under its
Common Sense Initiative (CSI) programs to
benefit companies certified.
What is the benefit?
Help remain competitive
• Competitors, customers and suppliers are
seeking registration.
• Identify areas for reduction in energy and other
resource consumption, reduce environmental
liability & risk, help to maintain consistent
compliance with legislative & regulatory
requirements, benefit from regulatory incentives,
prevent pollution & reduce waste, response to
pressure from customers & shareholders,
improve community goodwill, profit in the
market for green products, response to insurance
company pressure, and demonstrate commitment
to high quality.
EPA Guidance
In Enforcement Settlements
EMS as injunctive relief
to return violators to compliance
• and minimize or eliminate the potential for
repeat violations by addressing the root causes
of noncompliance.
• Where EPA determines that the root cause of a
defendant’s or respondent’s violations is the
absence of a systematic approach to identifying,
understanding, and managing the regulated
entity’s compliance with applicable
environmental requirements.
• Where specific elements or requirements
common to EMSs are independently required
by law or regulation, such elements/
requirements should be sought as injunctive
relief whether or not a compliance-focused
EMS, per se, is sought.
 Regulatory requirements
• Clean Water Act, Clean Air Act, Resource
Conservation and Recovery Act.
• 12 Elements of Compliance-Focused
Environmental Management System (CFEMS):
1. An environmental policy with an express
statement of management’s intent to provide
adequate EMS personnel and resources.
2. Processes and monitoring to ensure sustained
compliance.
3. Written targets, objectives, and action plans,
for each organizational subunit, to achieve and
maintain compliance with all environmental
requirements.
4. A mandatory pollution prevention program.
5. A program for ongoing community education
and involvement in the environmental aspects
of the defendants’ operations.
6. Procedures for investigating and promptly
correcting violations and their root causes.
7. Ongoing evaluation of facility compliance,
including periodic compliance audits by
independent 3rd party auditors.
 EMSs as Supplemental Environmental
Projects (SEPs)
 for small businesses and state and local
governments
• EMSs that meet the SEP Policy criteria are
eligible for penalty mitigation credit as “Other
Types of Projects” without advance approval.
• The SEP Policy, and federal law, require SEPs
to be “supplemental” projects that the violators
are “not otherwise legally required to perform.”
• The SEP Policy’s “environmentally beneficial
projects” and “public benefits” SEP criteria can
generally be satisfied when the terms of
settlement require the violators to implement
their EMSs for at least one full EMS cycle,
identify and report performance results on two
or more EMS targets and objectives promoting
beyond-compliance results with public benefits,
ensure that issues and priorities of concern to the
communities in which the facilities are located
are identified and considered, and submit to EPA
SEP Completion Reports describing what the
violators have done to develop, implement, and
act on their EMSs.
• SEP credit should be extended only to EMS
expenditures that produce significant benefits
accruing primarily to the public.
• EPA personnel have the discretion to calculate a
settlement penalty that reflects relevant actions
by violators. With respect to EMSs, the range of
possible scenarios where a violator’s actions may
be considered in adjusting a penalty downward
from the preliminary penalty amount include
where a company discovers a violation through
an existing EMS and corrects the violation prior
to EPA’s discovery or the company lacks a
preexisting EMS but puts one into place before
concluding settlement negotiations.
• It may also be appropriate to consider whether
and to what extent a violator has implemented an
EMS in assessing the degree of willfulness
and/or negligence.
RoHS
European Directive
The Restrictions of the use of certain
Hazardous Substances in electrical and
electronic equipment
ban the putting on the EU market
• of new Electrical and Electronic Equipment
(EEE) containing more than the permitted levels
(maximum concentration values) of lead,
cadmium, mercury, hexavalent chromium and
both polybrominated biphenyl (PBB,多溴化聯
苯 ) and polybrominated diphenyl ether (PBDE,
多溴聯苯醚 ) flame retardants from 1 July 2006.
• There are a number of exempted applications for
these substances (and an exemption for spare
parts for the repair of equipment put on the
market before 1 July 2006; the regulations do
not apply to the re-use (capacity expansion or
update) of equipment that was put on the market
before the same date).
• Producers must be able to demonstrate
compliance by submitting technical
documentation or other information to the
enforcement authority on request and retain such
documentation for a period of four years after
the EEE is placed on the market.
• Responsibility for the enforcement will lay with
the Secretary of State for Trade & Industry, who
has appointed the National Weights and
Measures Laboratory (NWML), an executive
agency of the Department of Trade and Industry,
to act on his behalf.
Definition
Maximum concentration value
• A maximum concentration value of up to 0.1%
by weight in homogeneous materials for lead,
mercury, hexavalent chromium, PBB and PBDE
and of up to 0.01% by weight in homogenous
materials for cadmium will be permitted in the
manufacture of new EEE. These values were
established through the adoption of a
Commission Decision on 18 August 2005.
Homogeneous material
• A material that cannot be mechanically
disjointed into different materials.
Scope
Categories of EEE covered
1. Large household appliances
2. Small household appliances
3. IT and telecommunication equipment
4. Consumer equipment
5. Lighting equipment
6. Electric and electronic tools
7. Toys, leisure and sports equipment
8. Automatic dispensers (自動??)
• Reflect eight of the ten categories in Annex 1 of
the Waste Electrical and Electronic Equipment
(WEEE) Directive.
• Apply both to electric light bulbs and to
household luminaries.
• The two categories of the WEEE Directive not
included are Medical Devices and Monitoring &
Control Instruments. Article 6 of the RoHS
Directive places an obligation on the European
Commission to present proposals for including
EEE falling within those two categories within
the scope of the RoHS Directive, once scientific
and technical evidence has demonstrated that
such proposals are feasible.
• The criteria for assessing “grey area” products
(those whose inclusion is in doubt) have been
discussed in the Technical Adaptation
Committee (TAC) of Member States and is
reflected in the Commission’s non-legally
binding Frequently Asked Questions document
on the WEEE and RoHS Directives
Outside the scope
• Intended for a specific national security and/or
military purpose. This exemption would not
apply to any equipment that is not designed
exclusively for these purposes.
• Products where electricity is not the main power
source: Many products contain electrical and
electronic components, either for additional
functionality or as peripheral parts, e.g., a
combustion engine with an electronic ignition.
• Products where the electrical or electronic
components are not needed to fulfil the primary
function: particularly toys and novelty items
contain an electrical or electronic element that
gives added value to the product. Often there are
similar products on the market fulfilling the
same function, but without these components.
• Electrical and electronic equipment that is part
of another type of equipment: Examples of such
equipment would be lighting or entertainment
equipment for use in vehicles, trains or aircraft.
The elements of a system that are not discernible
EEE products in their own right or that do not
have a direct function away from the installation
are excluded from the scope of the Regulations.
• Batteries: includes batteries that are permanently
fixed into the product, as well as disposable
batteries. The text of the draft Directive on
Batteries and Accumulators & Waste Batteries
and Accumulators is currently being finalised,
with an expectation that it will be adopted
shortly and come into effect in 2008.
Exemptions
• Large scale stationary industrial tools
1.Mercury in compact fluorescent lamps not
exceeding 5 mg per lamp.
2. Mercury in straight fluorescent lamps for
general purposes not exceeding:
– 10 mg in halophosphate lamps
– 5 mg in triphosphate lamps with a normal
lifetime
– 8 mg in triphosphate lamps with a long
lifetime.
3. Mercury in straight fluorescent lamps for
special purposes.
4. Mercury in other lamps (high intensity
discharge HID) not specifically mentioned here.
5. Lead in glass of cathode ray tubes, electronic
components and fluorescent tubes (viable
alternatives for these applications have not yet
been identified).
6. Lead as an alloying element in steel containing
up to 0.35% lead by weight, aluminum
containing up to 0.4% lead and as a copper
alloy containing up to 4% lead.
7. Lead in high melting temperature type solders
(i.e. lead based alloys containing 85% by
weight or more lead). Viable lead-free
alternatives have not yet been identified.
– ‘Solder’ is defined as “alloys used to create
metallurgical bonds between two or more
metal surfaces to achieve an electrical
and/or physical connection”. In this context,
the term ‘solder’ also includes all materials
that become part of the final solder joint,
including solder finishes on components or
printed circuit boards.
8. Lead in solders for servers, storage and storage
array systems, network infrastructure
equipment for switching, signaling,
transmission as well as network management
for telecommunication.
– For professional, high reliability
applications.
9. Lead in electronic ceramic parts (e.g.
piezoelectronic devices)
10. Cadmium and its compounds in electrical
contacts and cadmium plating except for
applications banned under Directive
91/338/EEC relating to restrictions on the
marketing and use of certain dangerous
substances and preparations (products
manufactured in the household goods and
central heating and air conditioning plant
sectors).
– ‘Cadmium plating’ means any deposit or
coating of metallic cadmium on a metallic
surface.”
11.Hexavalent chromium as an anti-corrosion of
the carbon steel cooling system in absorption
refrigerators.
– Absorption fridges are often used in
recreational vehicles (e.g. motor homes and
caravans) or remote places where electricity
is not available. Another typical application
is for minibars in hotel rooms as these
fridges are virtually noiseless.
– The applied heat and use of a waterammonia mixture results in a corrosive
environment that warrants the use of
hexavalent chromium. This exemption has
been introduced, since viable alternatives
for this specific application have so far not
been identified.
12.Deca BDE in polymeric applications.
13.Lead in lead-bronze bearing shells and bushes.
– Used, amongst others, in compressors for
stationary refrigeration and air conditioning
equipment.
– Need excellent self-lubrication properties to
meet the high durability and reliability
requirements.
– So far no suitable alternative has been
identified, although other materials have
been extensively tested.
14.Lead used in compliant pin connector systems.
– Used to attach connectors or components to
a double-sided printed circuit board.
– Avoids the need for soldering during
manufacturing, thereby avoiding the
overheating of components and damaging
the integrity of the connectors and board
material and allows separation for repair.
– Suitable alternatives to the tin-lead alloy
have not yet been identified.
15.Lead as a coating material for the thermal
conduction module c-ring.
– Such modules are the key components of a
mainframe central processing unit and
typically contain multiple chips. The c-ring
functions as a hermetical seal, continuously
dissipating heat and preventing oxidation of
solder joints.
– No feasible alternative has so far been
identified.
16.Lead and cadmium in optical and filter glass.
– To obtain specific properties and meet
quality standards, for a wide variety of
applications including in the photo industry
(e.g. camera lenses), in projectors, scanners,
printers and copiers.
– Suitable alternatives for many of these
applications have not yet been identified.
17.Lead in solders consisting of more than two
elements for the connection between the pins
and the package of microprocessors with a lead
content of more than 80% and less than 85% by
weight.
– Microprocessors are mounted onto boards
or substrates by way of a socket. Such
sockets require that a large number of pins
(up to 950) are mounted onto the
microprocessor for completing the
necessary electrical connections.
– This exemption has been introduced to
allow for the development of alternative
designs without generating excessive
amounts of waste.
18.Lead in solders to complete a viable electrical
connection between semiconductor die and
carrier within integrated circuit Flip Chip
packages.
– The external solder connections between
packages and PCB known as level 2 are
excluded from this exemption as viable
alternatives have been developed.
19.Lead in linear incandescent lamps (using a
glowing filament) with silicate coated tubes.
20.Lead halide as radiant agent in High Intensity
Discharge lamps for professional reprography
applications.
– HID lamps produce light by striking an
electrical arc across tungsten electrodes
housed inside a specially designed inner
fused quartz or fused alumina tube. This
tube is filled with both gas and metals. The
gas aids in the starting of the lamps and the
metals produce the light once they are
heated to a point of evaporation. Certain
HID lamp types contain lead-iodide (PbI2)
as a component in the filling.
– These lamps are used in professional U.V.
applications: the curing, reprography and
label printing industries. The lead is used
for creating the correct lamp emission
spectrum and lamp effectiveness.
21.Lead as activator in the fluorescent powder
(1% lead by weight or less) of discharge lamps
when used as sun tanning lamps containing
phosphors such as BSP (BaSi2O5:Pb) as well
as when used as specialty lamps for diazoprinting reprography, lithography, insect traps,
photochemical and curing processes containing
phosphors such as SMS ((Sr,Ba)2MgSi2O7:Pb).
22.Lead with PbBiSn-Hg and PbInSn-Hg in
specific compositions as main amalgam and
with PbSn-Hg as auxiliary amalgam in very
compact Energy Saving Lamps.
23.Lead oxide in glass used for bonding front and
rear substrates of flat fluorescent lamps used for
Liquid Crystal Displays.
– Lead is currently used in the glass panel of
Liquid Crystal Display (LCD) screens. Two
glass substrates are bonded with high
precision by inserting glass spacers in
between, to keep the same gap. Lead is used
there to prevent overheating of the glass,
which would result in image distortion and
malfunction.
– It is found in the form of a solder with a
concentration of 70% lead by weight, used to
create a safe electrical contact on the plane
glass surface. Lead containing glass solder is
also used to assemble the flat-panel glass
envelope.
Social Accountability International
Founded in 1997
Mission: promote human rights for
workers around the world.
About SAI, www.sa-intl.org
• A non-governmental, international, multistakeholder organization.
• Convenes key stakeholders to develop
consensus-based voluntary standards, conducts
cost-benefit research, accredits auditors,
provides training and technical assistance, and
assists corporations in improving social
compliance in their supply chains.
Social Accountability 8000
• A comprehensive and flexible system for
managing ethical workplace conditions
throughout global supply chains.
• Provide both practical and visionary solutions
for ethical supply chain management.
• Based on the principles of thirteen international
human rights conventions.
• The first auditable social standard and creates a
process that is truly independent.
• The benefits of adopting SA8000 are significant
and may include improved staff morale, more
reliable business partnerships, enhanced
competitiveness, less staff turnover and better
worker-manager communication.
SA8000® Certification
• Available only through SAI-accredited,
independent organizations, known as a
Certification Body.
 Bases
 International Labor Organization
1. ILO Conventions 29 and 105 (Forced &
Bonded Labour)
2. ILO Convention 87 (Freedom of
Association)
3. ILO Convention 98 (Right to Collective
Bargaining)
4. ILO Conventions 100 and 111 (Equal
remuneration for male and female workers
for work of equal value; Discrimination)
5. ILO Convention 135 (Workers’
Representatives Convention)
6. ILO Convention 138 & Recommendation
146 (Minimum Age and Recommendation)
7. ILO Convention 155 & Recommendation
164 (Occupational Safety & Health)
8. ILO Convention 159 (Vocational
Rehabilitation & Employment/Disabled
Persons)
9. ILO Convention 177 (Home Work)
10.ILO Convention 182 (Worst Forms of
Child Labour)
 United Nations
11.Universal Declaration of Human Rights
12.The United Nations Convention on the
Rights of the Child
13.The United Nations Convention to
Eliminate All Forms of Discrimination
Against Women
SA 8000
 Purpose and scope
 This standard specifies requirements for
social accountability to enable a
company to:
a) develop, maintain, and enforce policies and
procedures in order to manage those issues
which it can control or influence;
b) demonstrate to interested parties that
policies, procedures and practices are in
conformity with the requirements of this
standard.
Definition
Child
Any person less than 15 years of age,
• unless local minimum age law stipulates a
higher age for work or mandatory schooling, in
which case the higher age would apply.
• If, however, local minimum age law is set at 14
years of age in accordance with developingcountry exceptions* under ILO Convention 138,
the lower age will apply.
Young worker
Any worker over the age of a child and
under the age of 18. (old workers?)
Child labor
Any work by a child younger than the age(s)
specified except as provided for by ILO
Recommendation 146.**
Remediation of children
All necessary support and actions to ensure
the safety, health, education, and
development of children
• who have been subjected to child labour, as
defined above, and are dismissed.
Forced labor
All work or service that is extracted from
any person under the menace of any penalty
for which said person has not offered
him/herself voluntarily
• or for which such work or service is demanded
as a means of repayment of debt.
Working
hours
Disciplinary
practices
Discrimination
Remuneration
Child
labor
Social accountability
requirements
Forced
labor
Freedom of
association
Health
& safety
Social accountability requirements
Child labor
Shall not engage in or support the use of
child labour.
Shall establish, document, maintain, and
effectively communicate to personnel and
other interested parties policies & procedures
• for remediation of children found to be working
and shall provide adequate support to enable
such children to attend and remain in school
until no longer a child as defined above.
• for promotion of education for children covered
under ILO Recommendation 146 and young
workers who are subject to local compulsory
education laws or are attending school,
– including means to ensure that no such child
or young worker is employed during school
hours and that combined hours of daily
transportation (to and from work and school),
school, and work time do not exceed 10
hours a day.
Shall not expose children or young workers
to situations in or outside of the workplace
that are hazardous, unsafe, or unhealthy.
Forced labor
Shall not engage in or support the use of
forced labour,
• nor shall personnel be required to lodge ‘deposits’
or identity papers upon commencing
employment with the company.
Health and safety
Bearing in mind the prevailing knowledge of
the industry and of any specific hazards,
• shall provide a safe and healthy working
environment and shall take adequate steps to
prevent accidents and injury to health arising out
of, associated with or occurring in the course of
work, by minimizing, so far as is reasonably
practicable, the causes of hazards inherent in the
working environment.
• Shall appoint a senior management
representative responsible for the health and
safety of all personnel, and accountable for the
implementation of the Health and Safety
elements of this standard.
• Shall ensure that all personnel receive regular
and recorded health and safety training, and that
such training is repeated for new and reassigned
personnel.
• Shall establish systems to detect, avoid or
respond to potential threats to the health and
safety of all personnel.
• Shall provide, for use by all personnel, clean
bathrooms, access to potable water, and, if
appropriate, sanitary facilities for food storage.
• Shall ensure that, if provided for personnel,
dormitory facilities are clean, safe, and meet the
basic needs of the personnel.
Freedom of association
& right to collective bargaining
• Shall respect the right of all personnel to form
and join trade unions of their choice and to
bargain collectively.
• Shall, in those situations in which the right to
freedom of association and collective bargaining
are restricted under law, facilitate parallel means
of independent and free association and
bargaining for all such personnel.
• Shall ensure that representatives of such
personnel are not the subject of discrimination
and that such representatives have access to their
members in the workplace.
Discrimination
Shall not engage in or support
discrimination
• in hiring, remuneration, access to training,
promotion, termination or retirement based on
race, caste, national origin, religion, disability,
gender, sexual orientation, union membership,
political affiliation, or age.
• Shall not interfere with the exercise of the rights
of personnel to observe tenets or practices, or to
meet needs relating to race, caste, national origin,
religion, disability, gender, sexual orientation,
union membership, or political affiliation.
• Shall not allow behaviour, including gestures,
language and physical contact, that is sexually
coercive, threatening, abusive or exploitative.
Disciplinary practices
Shall not engage in or support the use of
• corporal punishment, mental or physical
coercion, and verbal abuse.
Working hours
Shall comply with applicable laws and
industry standards on working hours.
• The normal workweek shall be as defined by law
but shall not on a regular basis exceed 48 hours.
• Personnel shall be provided with at least one day
off in every seven-day period.
• All overtime work shall be reimbursed at a
premium rate and under no circumstances shall
exceed 12 hours per employee per week.
Where the company is party to a collective
bargaining agreement freely negotiated with
worker organizations (see ILO) representing
a significant portion of its workforce,
• it may require overtime work in accordance with
such agreement to meet short-term business
demand. Any such agreement must comply with
the above requirements
Other than as permitted above,
• overtime work shall be voluntary.
Remuneration
Shall ensure that wages paid for a standard
working week shall always meet at least
legal or industry minimum standards
• and shall be sufficient to meet basic needs of
personnel and to provide some discretionary
income.
• Shall ensure that deductions from wages are not
made for disciplinary purposes,* and shall
ensure that wage and benefits composition are
detailed clearly and regularly for workers.
• Shall also ensure that wages and benefits are
rendered in full compliance with all applicable
laws and that remuneration is rendered either in
cash or check form, in a manner convenient to
workers.**
• Shall ensure that labour-only contracting
arrangements and false apprenticeship schemes
are not undertaken in an effort to avoid fulfilling
its obligations to personnel under applicable
laws pertaining to labour and social security
legislation and regulations.
Access for
verification
Policy
Records
Management
review
Outside
communication
Addressing
concerns &
taking
corrective
action
Management
systems
Control of
suppliers/
subcontractors
& sub-suppliers
Company
representatives
Planning &
implementation
Management systems
Policy
Top management shall define the company’s
policy for social accountability and labour
conditions to ensure that it:
a)includes a commitment to conform to all
requirements of this standard;
b)includes a commitment to comply with national
and other applicable law, other requirements to
which the company subscribes and to respect the
international instruments and their interpretation;
c)includes a commitment to continual
improvement;
d) is effectively documented, implemented,
maintained, communicated and is accessible in
a comprehensible form to all personnel,
including directors, executives, management,
supervisors, and staff, whether directly
employed, contracted or otherwise representing
the company;
e) is publicly available.
 Management review
 Top management shall periodically review
• the adequacy, suitability, and continuing
effectiveness of the company’s policy,
procedures and performance results vis-a-vis
the requirements of this standard and other
requirements to which the company subscribes.
• System amendments and improvements shall
be implemented where appropriate.
Company representatives
Shall appoint a senior management
representative who,
• irrespective of other responsibilities, shall
ensure that the requirements of this standard are
met.
• Shall provide for non-management personnel to
choose a representative from their own group to
facilitate communication with senior
management on matters related to this standard.
Planning and implementation
Shall ensure that the requirements of this
standard are understood and implemented at
all levels of the organisation; methods shall
include, but are not limited to:
a) clear definition of roles, responsibilities, and
authority;
b) training of new and/or temporary employees
upon hiring;
c) periodic training and awareness programs for
existing employees;
d) continuous monitoring of activities and results
to demonstrate the effectiveness of systems
implemented to meet the company’s policy and
the requirements of this standard.
 Control of suppliers/subcontractors and
sub-suppliers
 Shall establish and maintain appropriate
procedures
• to evaluate and select suppliers/subcontractors
(and, where appropriate, sub-suppliers) based
on their ability to meet the requirements of this
standard.
Shall maintain appropriate records of
suppliers/subcontractors’ (and, where
appropriate, sub-suppliers’) commitments to
social accountability, including, but not
limited to, the written commitment of those
organizations to:
a) conform to all requirements of this standard
(including this clause*);
b) participate in the company’s monitoring
activities as requested;
c) promptly implement remedial and corrective
action to address any nonconformance
identified against the requirements of this
standard;
d) promptly and completely inform the company
of any and all relevant business relationship(s)
with other suppliers/subcontractors and subsuppliers.
• Shall maintain reasonable evidence that the
requirements of this standard are being met by
suppliers and subcontractors.
• Where the company receives, handles or
promotes goods and/or services from
suppliers/subcontractors or sub-suppliers who
are classified as homeworkers, the company
shall take special steps to ensure that such
homeworkers are afforded a similar level of
protection as would be afforded to directly
employed personnel under the requirements of
this standard. Such special steps shall include
but not be limited to:
a) establishing legally binding, written purchasing
contracts requiring conformance to minimum
criteria (in accordance with the requirements of
this standard);
b) ensuring that the requirements of the written
purchasing contract are understood and
implemented by homeworkers and all other
parties involved in the purchasing contract;
c) maintaining, on the company premises,
comprehensive records detailing the identities
of homeworkers; the quantities of goods
produced/services provided and/or hours
worked by each homeworker;
d) frequent announced and unannounced
monitoring activities to verify compliance with
the terms of the written purchasing contract.
 Addressing concerns and taking
corrective action
 Shall investigate, address, and respond
• to the concerns of employees and other
interested parties with regard to conformance/
nonconformance with the company’s policy
and/or the requirements of this standard;
• The company shall refrain from disciplining,
dismissing or otherwise discriminating against
any employee for providing information
concerning observance of the standard.
• Shall implement remedial and corrective action
and allocate adequate resources appropriate to
the nature and severity of any nonconformance
identified against the company’s policy and/or
the requirements of the standard.
Outside communication
Shall establish and maintain procedures to
communicate regularly
• to all interested parties data and other
information regarding performance against the
requirements of this document, including, but
not limited to, the results of management
reviews and monitoring activities.
Access for verification
Where required by contract, shall provide
reasonable information and access
• to interested parties seeking to verify
conformance to the requirements of this standard;
where further required by contract, similar
information and access shall also be afforded by
the company's suppliers and subcontractors
through the incorporation of such a requirement
in the company's purchasing contracts.
Records
Shall maintain appropriate records
• to demonstrate conformance to the requirements
of this standard.
Business Principles for
Countering Bribery
An initiative of Transparency International
and Social Accountability International
December 2002
Foreword
Development
In a partnership project undertaken with a
Steering Committee drawn from companies,
academia, trade unions and other nongovernmental bodies.
• Growing corporate awareness of the risks posed
by bribery, particularly in the light of recent
scandals, and the public is expecting greater
accountability and probity from the corporate
sector. (Bribery: An offer or receipt of any gift,
loan, fee, reward or other advantage to or from
any person as an inducement to do something
which is dishonest, illegal or a breach of trust, in
the conduct of the enterprise’s business.)*
• A practical tool to which companies can look for
a comprehensive reference to good practice (as
opposed to best) to counter bribery.
Give practical effect to recent initiatives
• The OECD Convention on Combating Bribery
of Foreign Public Officials in International
Business Transactions
• The ICC Rules of Conduct to Combat Extortion
and Bribery
• The anti-bribery provisions of the revised OECD
Guidelines for Multinationals.
Purpose
• Provide practical guidance for countering
bribery, creating a level playing field and
providing a long-term business advantage.
• Apply to bribery of public officials and to
private-to-private transactions.
Implementation
requirements:
1. Organization &
responsibilities
2. Business
relationships
3. Human
resources
4. Training
5. Raising concerns
& seeking guidance
6. Communication
7. Internal controls
& audit
8. Monitoring
& review
Business
principles
Countering Bribery
Scope
Aims
Program
development
Countering Bribery
Business principles
Shall prohibit bribery in any form whether
direct or indirect.
Shall commit to implementation of a
Programme to counter bribery
• based on a commitment to fundamental values
of integrity, transparency and accountability.
• Shall aim to create and maintain a trust-based
and inclusive internal culture in which bribery is
not tolerated.
• The Programme is the entirety of an enterprise’s
anti-bribery efforts including values, policies,
processes, training and guidance.
 Aims
 Provide a framework for good business
practices and risk management strategies
for countering bribery.
 Assist enterprises to
a) eliminate bribery
b) demonstrate their commitment to countering
bribery
c) make a positive contribution to improving
business standards of integrity, transparency
and accountability wherever they operate.
Program development
Reflecting the size, business sector, potential
risks and locations of operation,
• which should, clearly and in reasonable detail,
articulate values, policies and procedures to be
used to prevent bribery from occurring in all
activities under effective control.
Should be consistent with all laws relevant
to countering bribery in all the jurisdictions
• in which the enterprise operates, particularly
laws that are directly relevant to specific
business practices.
In consultation with employees, trade unions
or other employee representative bodies.
• Ensure that the enterprise is informed of all
matters material to the effective development of
the Programme by communicating with relevant
interested parties.
 Scope
 Should analyse which specific areas pose
the greatest risks from bribery.
 Should address the most prevalent forms of
bribery relevant to the enterprise but at a
minimum should cover the following areas
1. Bribes
• Should prohibit the offer, gift, or acceptance of
a bribe in any form, including kickbacks, on
any portion of a contract payment, or the use of
other routes or channels to provide improper
benefits to customers, agents, contractors,
suppliers or employees of any such party or
government officials.
• Should prohibit an employee from arranging or
accepting a bribe or kickback from customers,
agents, contractors, suppliers, or employees of
any such party or from government officials, for
the employee’s benefit or that of the employee’s
family, friends, associates or acquaintances.
2. Political contributions
• The enterprise, its employees or agents should
not make direct or indirect contributions to
political parties, organisations or individuals
engaged in politics, as a way of obtaining
advantage in business transactions.
• Should publicly disclose all its political
contributions.
3. Charitable contributions and sponsorships
• Should ensure that charitable contributions and
sponsorships are not being used as a subterfuge
for bribery.
• Should publicly disclose all its charitable
contributions or sponsorships.
4. Facilitation payments
• Also called “facilitating”, “speed” or “grease”
payments, these are small payments made to
secure or expedite the performance of a routine
or necessary action to which the payer of the
facilitation payment has legal or other
entitlement.
• Recognising that facilitation payments are a
form of bribery, should identify, minimise and
preferably eliminate them.
5. Gifts, hospitality and expenses
• Should prohibit the offer or receipt of gifts,
hospitality or expenses whenever such
arrangements could affect the outcome of
business transactions and are not reasonable
and bona fide expenditures.
 Implementation requirements
 Should meet, at a minimum
1. Organization and responsibilities
• The Board of Directors or equivalent body
should base their policy on the Business
Principles and provide leadership, resources
and active support for management’s
implementation of the Programme.
• The Chief Executive Officer is responsible for
ensuring that the Programme is carried out
consistently with clear lines of authority.
• The Board of Directors, Chief Executive
Officer and senior management should
demonstrate visible and active commitment to
the implementation of the Business Principles.
2. Business relationships
• Should apply its Programme in its dealings
with subsidiaries, joint venture partners, agents,
contractors and other third parties with whom it
has business relationships.
• Subsidiaries and joint ventures
– Should conduct due diligence before
entering into a joint venture.
– Should ensure that subsidiaries and joint
ventures over which it maintains effective
control adopt its Programme.
– Where an enterprise does not have effective
control it should make known its
Programme and use its best efforts to
monitor that the conduct of such
subsidiaries and joint ventures is consistent
with the Business Principles.
• Agents
– Should not channel improper payments
through an agent.*
– Should undertake due diligence before
appointing an agent.
– Compensation paid to agents should be
appropriate and justifiable remuneration for
legitimate services rendered.
– The relationship should be documented.
– The agent should contractually agree to
comply with the enterprise’s Programme.
– Should monitor the conduct of its agents and
should have a right of termination in the
event that they pay bribes.
• Contractors and suppliers
– Should conduct its procurement practices in
a fair and transparent manner.
– Should undertake due diligence in
evaluating major prospective contractors
and suppliers to ensure that they have
effective anti-bribery policies.
– Should make known its anti-bribery
policies to contractors and suppliers. It
should monitor the conduct of major
contractors and suppliers and should have a
right of termination in the event that they
pay bribes.*
– Should avoid dealing with prospective
contractors and suppliers known to be
paying bribes.
3. Human resources
• Recruitment, promotion, training, performance
evaluation and recognition should reflect the
enterprise’s commitment to the Programme.
• The human resources policies and practices
relevant to the Programme should be developed
and undertaken in consultation with employees,
trade unions or other employee representative
bodies as appropriate.
• Should make it clear that no employee will
suffer demotion, penalty, or other adverse
consequences for refusing to pay bribes even if
it may result in the enterprise losing business.
• Should apply appropriate sanctions for
violations of its Programme.
4. Training
• Managers, employees and agents should
receive specific training on the Programme.
• Where appropriate, contractors and suppliers
should receive training on the Programme.
5. Raising concerns and seeking guidance
• To be effective, the Programme should rely on
employees and others to raise concerns and
violations as early as possible. To this end,
should provide secure and accessible channels
through which employees and others should
feel able to raise concerns and report violations
(“whistle blowing”) in confidence and without
risk of reprisal.
• These channels should also be available for
employees and others to seek advice or suggest
improvements to the Programme. To support
this process, should provide guidance to
employees and others with respect to the
interpretation of the Programme in individual
cases.
6. Communications
• Should establish effective internal and external
communication of the Programme.
• Should, on request, publicly disclose the
management systems it employs in countering
bribery.
• Should be open to receiving communications
from relevant interested parties with respect to
the Programme.
7. Internal controls and audit
• Should maintain accurate books and records,
available for inspection, which properly and
fairly document all financial transactions.
Should not maintain off-the-books accounts.
• Should establish feedback mechanisms and
other internal processes supporting the
continuous improvement of the Programme.
• Should subject the internal control systems, in
particular the accounting and record keeping
practices, to regular audits to provide assurance
that they are effective in countering bribery.
8. Monitoring and review
• Senior management should monitor the
Programme and periodically review the
Programme’s suitability, adequacy and
effectiveness and implement improvements as
appropriate.
• Should periodically report to the Audit
Committee or the Board the results of the
Programme review.
• The Audit Committee or the Board should
make an independent assessment of the
adequacy of the Programme and disclose its
findings in the Annual Report to shareholders.
Transparency International
Founded in 1993.
The leading international organisation devoted
to curbing bribery.
With the mission to build coalitions of civil society,
governments and the private sector to join in the
fight against corruption.
• TI’s work is based on the belief that corruption is
a major threat to human rights, development and
international trade, and that containing
corruption to manageable levels calls for the
creation of a broad coalition. Engagement with
the private sector is key to its mission.
References (reading)
TI, Corruption Perceptions Index, Nov. 6, 2006
 A strong correlation between corruption and poverty,
with a concentration of impoverished states at the
bottom of the ranking.
 Chair Huguette Labelle. “Despite a decade of progress
in establishing anti-corruption laws and regulations,
today’s results indicate that much remains to be done
before we see meaningful improvements in the lives of
the world’s poorest citizens.”
 Scores countries on a scale from zero to ten, with zero
indicating high levels of perceived corruption. Almost
three-quarters of the countries in the CPI score below
five (including all low-income countries and all but two
African states).
 The facilitators of corruption continue to assist political
elites to launder, store and otherwise profit from
unjustly acquired wealth, which often includes looted
state assets.
 TI advocates strong measures to curb bribery’s supply
side, including the criminalisation of overseas bribery
under the OECD Anti-Bribery Convention, as well as
its demand side, including disclosure of assets for
public officials and adoption of codes of conduct.
 But the transaction is often enabled by professionals
from many fields. Corrupt intermediaries link givers
and takers, creating an atmosphere of mutual trust and
reciprocity; they attempt to provide a legal appearance
to corrupt transactions, producing legally enforceable
contracts; and they help to ensure that scapegoats are
blamed in case of detection.
TI, Global Corruption Barometer,* Dec.7, 2006
 The police are the sector most affected by bribery, with
17 percent of those who have had contact paying a
bribe. Police are most commonly bribed in Africa and
Latin America.
 Bribery for access to services is most common in Africa.
The most commonly bribed sectors in Africa are the
police, tax revenue and utilities.
 People around the world tend to be very negative about
their government’s attempt to fight corruption. Only
one in five surveyed worldwide think that their
government is effective to some degree in fighting
corruption; nearly two in five say the government is
‘not effective’ in its anti-corruption work.
 One in six surveyed globally thinks that their
government actually encourages corruption rather than
fighting it.
 Despite relatively good scores on the Corruption
Perceptions Index 2006, nearly one in five respondents
in the United States and the United Kingdom thinks that
their government encourages corruption rather than
fighting it.
 The public views political parties as the most corrupt
institution, followed by parliament/legislature.
 Police are considered to be the sector most affected by
corruption in both Africa and the Newly Independent
States.
 The Taiwanese public reports an increase in levels of
corruption in most of the institutions and sectors
covered by the Barometer 2006 during the last two
years. The public in Hong Kong and Croatia also view
corruption as worse in a number of sectors, while, in
contrast, in India there have been some perceived
improvements.
 Political life is viewed as being most affected by
corruption, followed closely by the business
environment.*
 Corruption is reported as affecting family life very little
in EU+ countries and the Newly Independent States,
but a great deal in Africa and South East Europe.
 Perceived corruption in political life in the United
States has increased in the last two years; perceived
corruption in Iceland’s business environment and
family life has increased; perceived corruption has
increased in Spain and Japan’s political life and
business environment.
Socially Responsible Investing (SRI)
An investment strategy which
combines the intentions to maximize
both financial return and social good.*
• In general, socially responsible investors favor
corporate practices which are environmentally
responsible, support workplace diversity, and
increase product safety and quality.
• Some (not all) also avoid businesses involved in
alcohol, tobacco, gambling, weapons and other
military industries, and/or abortion.
History
• Many believe social investing began with the
Religious Society of Friends (Quakers).
• In 1758, the Quaker Philadelphia Yearly Meeting
prohibited members from participating in the
business of buying or selling humans.
• One of the most articulate early adopters of SRI
was John Wesley (1703-1791), one of the
founders of the Methodist Church. A sermon
entitled “The Use of Money,” outlined his basic
tenets of social investing: not to harm your
neighbor through your business practices and to
avoid industries like tanning and chemical
production that pollute rivers and streams.
• Modern SRI movement began during the
Vietnam War. Many people living during the era
remember a picture in June of 1972* of a naked
nine year-old girl, Phan Thị Kim Phúc, running
towards a photographer screaming, her back
burning from the napalm dropped on her village.
• In the late 1970s, SRI activism turned its
attention to nuclear power and automobile
emissions control.
• During the 1950s and 1960s, labor unions
deployed multiemployer pension funds for
targeted investments. E.g., The United Mine
Workers fund invested in medical facilities, and
the ILGWU and IBEW financed union-built
housing projects. They also sought to leverage
pension stocks for shareholder activism on
proxy fights and shareholder resolutions.*
• Presidential candidates Jimmy Carter, Ronald
Reagan and Jerry Brown advocated some type of
social orientation for pension investments in ’80.
• After the Sharpeville Massacre in 1960,
international opposition to apartheid
strengthened. In 1976 the United Nations
imposed a mandatory arms embargo against
South Africa. In 1971, Reverend Leon Sullivan
(at the time a board member for General Motors)
drafted a code of conduct for practicing business
in South Africa which became known as the
“Sullivan Principles.”
• Reports documenting the application of the
Sullivan Principles discovered that US
companies were not attempting to lessen
discrimination within South Africa. Cities, states,
colleges, faith-based groups and pension funds
throughout the US began divesting (or removing
their investments) from companies operating in
South Africa.
• The negative flow of investment eventually
forced a group of businesses, representing 75%
of South African employers, to draft a charter
calling for an end to apartheid. While the SRI
efforts alone didn't bring an end to apartheid, it
did focus persuasive international pressure on
the South African business community.
Modern applications
• SRI is a booming market in both the US and
Europe. SRI in the US remained robust during
2001 and 2002, even as the rest of the
investment world was stagnant.
• Assets in socially screened portfolios climbed to
$2.15 tn in 2003, an increase over the $2.01 tn
counted in 2001 (7% growth). Community
investing and shareholder advocacy contribute
additional assets, resulting in a total of $2.18 tn
in professionally managed assets for all SRI.*
• The broader universe of all professionally
managed portfolios fell 4% during the same
period, according to the Social Investment
Forum’s 2003 Report on Socially Responsible
Investing Trends in the US.
• Research estimates by financial consultancy
Celent predict that the SRI market in the US will
reach $3 tn by 2011. The European SRI market
grew from €1 tn in 2005 to €1.6 tn in 2007.
Government-controlled (pension) funds
• Are being pressured by the citizenry and by
activist groups to adopt investment policies
which encourage ethical corporate behaviour.
• I.e., respect the rights of workers, take
environmental concerns into account, and
generally avoid violations of human rights.
• One outstanding endorsement is the Norwegian
Government Pension Fund, which is mandated
to avoid "investments which constitute an
unacceptable risk that the Fund may contribute
to unethical acts or omissions, such as violations
of fundamental humanitarian principles, serious
violations of human rights, gross corruption or
severe environmental damages."
Mutual funds
• Socially responsible mutual funds counted by
the 2003 Trends Report increased in number to
200 in 2003, up from 181 in 2001, 168 in 1999,
and 139 in 1997. Assets grew by 19%, to $162
bn, up from $136 bn in 2001, 51% of this
growth is attributed to both newly identified and
newly created funds, and 49% represents growth
in existing assets.
• In terms of attracting investor assets, socially
screened mutual funds grew on a net basis in
2002 ($1.5 bn according to Lipper) while U.S.
diversified equity funds contracted ($10.5 bn).
Separately managed accounts
• Of the $2.15 tn in socially screened portfolios,
$1.99 tn are found in separate accounts
(portfolios privately managed for individuals
and institutions) with the remaining $162 bn
residing in mutual funds. Assets in socially
screened separate accounts grew by 7% since the
“2001 Report” ($1.87 tn in 2001, $1.34 tn in
1999, and just $433 bn in 1997).
Shareholder advocacy
• Between 2001 and 2003, shareholder advocacy
activity increased by 15%, growing from 269
social and crossover resolutions (combined
aspects of both “social” and traditional corporate
governance issues) filed in 2001 to 310 in 2003.
• The average percentage of votes received on
these resolutions increased from 8.7% in 2001 to
11.4% in 2003. Of the total $2.15 tn in all
socially screened portfolios, $441 bn are in
portfolios controlled by investors who are also
involved in shareholder advocacy.
• Shareholder resolutions are filed by a wide
variety of institutional investors, including
public pension funds, faith-based investors,
socially responsible mutual funds, and labor
unions. In 2004, faith-based organizations filed
129 resolutions, while socially responsible funds
filed 56 resolutions.
• Regulations governing shareholder resolutions in
the US are determined by the SEC, which also
requires mutual funds to disclose how they voted
on behalf of their investors.
• U.S. shareholders have organized various groups
to facilitate jointly filing resolutions. These
include the Council of Institutional Investors, the
Interfaith Center on Corporate Responsibility,
and the Social Investment Forum.
Community investing
• Climbed 84% between 2001 and 2003. Assets
held and invested locally by community
development financial institutions (CDFIs)
based in the US totaled $14 bn in 2003, up from
$7.6 bn in 2001.
Investing strategies
1.Screening: excludes certain securities from
investment consideration based on social and/or
environmental criteria.
2.Divesting: removes stocks from a portfolio
based on mainly ethical, non-financial objections
to certain business activities of a corporation.
• Recently, CalSTRS (California State Teachers'
Retirement System) announced the removal of
more than $237 mn in tobacco holdings from its
investment portfolio after 6 months of financial
analysis and deliberations.
3.Shareholder activism: efforts attempt to
positively influence corporate behavior, include
initiating conversations with corporate
management on issues of concern, and
submitting and voting proxy resolutions.
• These activities are undertaken with the belief
that social investors, working cooperatively, can
steer management on a course that will improve
financial performance over time and enhance the
well being of the stockholders, customers,
employees, vendors, and communities.*
• Recent movements have also been reported of
"investor relations activism", in which investor
relations firms assist shareholder activists in an
organized push for change within a corporation.
• This is done typically by leveraging their
enhanced knowledge of the corporation, its
management (often via direct relationships), and
the securities laws as a whole.
4.Positive investing: involves making investments
in activities and companies believed to have a
high and positive social impact, tends to target
underserved communities. These efforts may
support activities designed to provide mortgage
and small business credit to minority and lowincome communities.
Satire and pro-market response
• At least one mutual fund, the Vice Fund
(VICEX), was created specifically to contrast
with the trend in SRI. VICEX specializes in
investing in the defense, alcohol, tobacco, and
gambling industries, and has greatly
outperformed both the S&P 500 and most
socially responsible mutual funds.
• The Free Enterprise Action Fund files
shareholder resolutions which oppose the
general trend of SRI, e.g., by asking GE to
"justify lobbying for global warming
regulation.“*
Ethical Banking
Ethical bank
A.k.a social, alternative, civic or
sustainable bank
A bank concerned about the social use of its
investments and loans.
• Shares a common set of principles, the most
prominent being the transparency and the social
or environmental aim of the projects they
finance. Some are specialized in microcredits.
• Usually work with narrower profit margins than
traditional ones, and tend to have few offices
and operate mostly by phone, Internet or mail.
• An extreme case of this is Smile (a branch of
Co-operative Bank of UK): it was the first
ethical bank that operates exclusively by Internet,
followed by eBay Microplace.
• Green banking is ethical banking specialized in
green energy, to address global warming.
Microcredit
The extension of very small loans
to the unemployed, poor entrepreneurs
and others living in poverty
who are not considered bankable.
• These individuals lack collateral, steady
employment and a verifiable credit history and
therefore cannot meet even the most minimal
qualifications to gain access to traditional credit.
• Microcredit is a part of microfinance, which is
the provision of a wider range of financial
services to the very poor.
• A financial innovation originated in Bangladesh
to enable extremely impoverished people to
engage in self-employment projects.
• Many in the traditional banking industry have
begun to realize that these microcredit borrowers
should more correctly be categorized as prebankable, and are contemplating microcredit
projects as a source of future growth.
• It was begun in its modern incarnation as pilot
projects with ACCION and Muhammad Yunus
in the mid-1970s. The United Nations declared
2005 the International Year of Microcredit.*
History
• The concept can be traced back to portions of
the Marshall Plan at the end of World War II or
even back to the mid-1800s and the writings of
abolitionist/legal theorist Lysander Spooner who
wrote concerning the benefits of numerous small
loans for entrepreneurial activities to the poor as
a way to alleviate poverty.
• Dr. Akhtar Hameed Khan, a social scientist, is
credited for pioneering and microfinance
through Comilla Co-operatives in 1960.#
Principles
• Tool for socio-economic development with
emphasis on Building Capacity of Micro
Entrepreneur, Employment Generation, Trust
Building and Help to Micro Entrepreneur on
initiation and during difficult times.*
Focus on Women
• The reasoning behind this is the observation that
loans to women tend to more often benefit the
whole family than loans to men do, and raises
their socio-economic status.**
Opportunity International
• In 1971, Al Whittaker resigned as president of
Bristol Myers and established Opportunity
International’s first US office in Washington DC.
• The first loan was made to Carlos Moreno in
Colombia to expand his one-man spice and tea
business. About the same time Australian
philanthropist, David Bussau, began making
microloans in Indonesia.
• The two men met and formed Opportunity
International, which provides opportunities for
people in chronic poverty to transform their lives
by creating jobs, stimulating small businesses,
and strengthening communities.
• Small loans ranging from $25 to $500 helped
poor families lift themselves out of poverty.
• Other Opportunity International offices are in
Australia, Great Britain and Canada, each
targeting countries within their region.
ACCION International
• In 1973 Accion International, a Peace Corps-like
group, started to switch focus toward providing
economic opportunity to poor people.
• Instead of working on construction/infrastructure
projects in order to create lasting improvements
in the lives of those they were helping.
• Their plan first appeared in Recife, Brazil in
1973 when ACCION staff began to offer
microloans to poor people eager to start small
businesses (avoid the exploitive lending
practices of loan sharks).
• Within four years, the experiment had shown its
success in having provided 885 loans with a
repayment rate of over 90%. The loans also
helped to create or stabilize 1,386 new jobs.
• Since this beginning, ACCION has expanded its
microlending operation to countries throughout
South and Central America, US, Africa and
India.*
Self Help Group, Indian expereince
• In India, micro credit is extended by Self Help
Groups and Cooperatives linkages.
• The National Bank for Agriculture and Rural
Development (NABARD), and apex
developmental bank cum government agency
focussing on rural and agricultural development
has been a great force through these linkages.
Grameen Bank
• Around the same time as ACCION's experiment,
and apparently independently, Muhammad
Yunus, a professor of economics at Chitagong
University started a similar experiment.
• Around 1974, during a famine in his native
Bangladesh, Yunus discovered that very small
loans could make a difference in a poor person's
ability to survive, but that traditional banks were
not interested in making such tiny loans.
• His first loan consisted of $27 from his own
pocket which he lent to 42 people including a
woman who made bamboo furniture, which she
sold to support herself and her family.
• In 1976, Yunus founded the Grameen Bank to
make loans to poor Bangladeshis. Since then, it
has issued more than $5 bn in loans to several
million borrowers.* At the close of 2005 the
number of outstanding loans is more than 4 mn.
• To ensure repayment, the bank uses a system of
solidarity lending through "solidarity groups":
small informal groups, nearly all of them
exclusively female, that meet weekly in their
villages to conduct business with representatives
of the bank and that support each other's efforts
at economic self-advancement.
• Has also developed other systems of alternate
credit which serve the poor, such as housing
loans, financing for fisheries, irrigation projects,
venture capital, textiles, etc.
• The success of the Grameen model has inspired
similar efforts throughout the developing world
and even in industrialized nations.
• Originally, the program started with men and
women but later focused on women when data
showed a dramatically lower credit risk.
• In 2006, Yunus and the Grameen bank were
honored with the Nobel Peace Prize.*
Development Gateway, USA
• A portal assisting many socio-economic
activities, having a community forum, Micro
Finance community that serves knowledge
center for global activities (share experience in
any particular country without any cost).
Women's World Banking (WWB)
• Founded in New York in 1976 by Ela Bhatt
(India), Esther Ocloo (Ghana) and Michaela
Walsh, an American investment banker.
• Bhatt had earlier founded the Mahila SEWA
Cooperative Bank in 1974, and she served as
WWB's chair from 1980 until 1998.
• The WWB president was reported in 2002 as
claiming that of half the microcredit loans made
worldwide to 25 million people, three-quarters
of them were made to women, and had been
made by WWB.
• Friends of Women's World Banking, an affiliate
to WWB, was established in the year 1982 by
Ela Bhatt as a non-profit organization to promote
direct participation of poor women in the
economy through access to financial services. It
was created to extend and expand informal
credit supports and networks within India to link
them to a global movement.
• As of now it is working in 14 states of India,
with 104 partner organizations with a total client
outreach of 5 million. Some of the biggest MFIs
in India like Share Microfin, Spandana, Bandhan,
SKS received their initial support from FWWB
and still continue their association with FWWB.
• According to Consultative Group to Assist the
Poor (CGAP), FWWB's niche lies in its proven
capability in identifying and hand holding
fledgling startup MFIs and grow them to a stage
where they become self sustainable.
FINCA International
• In the 1980s FINCA International continued the
successful trend of microcredit in Bolivia.
• John Hatch, founder, had worked on other
international credit programs and started doing
microcredit on his own, stressing local
autonomy and putting the poor in charge of the
programs.* He called it village banking.
• After Hatch had assembled a team, within four
weeks, they had created 280 village banks
serving 14,000 families with loans worth
$630,000. While the original program was shut
down, it was not because of a lack of success,
but because its backers felt uncollateralized
lending was too risky.
• Despite this setback, Hatch continued to pursue
his work and incorporated FINCA in 1985, this
time working in El Salvador, focused on women.
• The mission is to provide financial services to
the world's lowest-income entrepreneurs so they
can create jobs, build assets, and improve their
standard of living.
• In 2005, FINCA reached more than 400,000
clients, providing in excess of $100 mn in small
loans averaging $360. FINCA currently operates
programs in 21 countries in Africa, Latin
America and the Caribbean, Eastern Europe and
Central Asia. Women comprise 80% and the
organization has a loan repayment rate of 97%.
Thengamara Mohila Sabuj Sangha*
• TMSS is a women-oriented NGO from
Bangladesh, established in Bogra District, 1964.
• In 1980, a botany professor Dr. Hosne-Ara
Begum came forward to redirect the NGOs
social activty. She engaged herself as the
Founder Executive Director of TMSS.
• With the main patronizer [Palli Karma Shahayak
Foundation] (PKSF),TMSS is engaged in
uplifting the living condition of the most
distressed poor people particularly women and
children of both urban and rural areas.
• TMSS believes in self-help sustainable
development of the targeted beneficiaries
through their own efforts and resources.
• TMSS has emerged as one of the most efficient
and dynamic NGOs in the country. It has
extensive network and a large contingent of
well-trained and skilled manpower, including
9000 regular staffs, 7,000 voluntary and parttime staffs. The number of target beneficiaries
increased from 126 in 1980 to more than 1.8
million in 2005.
• The microcredit loan disbursement increased
from $8,000 to $125 mn during the same period
with a recovery rate of 99%.
SKS India
• SKS Microfinance was founded in 1998 by
Vikram Akula to provide loans to women living
in poor regions of India. According to its website,
SKS has provided over $205 mn in loans to
nearly 632,000 clients.
• Borrowers take loans in order to develop a
variety of income-generating farming and homebased manufacturing activities.
• Interest-free loans for emergencies and life
insurance are also offered to borrowers.
• SKS runs an affiliated program to improve
education for poor children.
• In May 2006, Vikram Akula was named to
TIME Magazine’s Top 100 List of Most
Influential People for the year 2006.
• In 2006, SKS Microfinance attracted the
attention and investment of Venture Capitalists
such as Vinod Khosla, Small Industries
Development Bank of India, Unitus Equity Fund,
and Sequoia Capital.
Some recent developments in India
• The Government of India is mulling some
regulation for the Microfinance industry.*
Today
• The World Bank estimates that there are now
more than 7,000 microfinance institutions,
serving some 16 million poor people in
developing countries.
• CGAP experts estimate that 500 million
households benefit from these small loans,
Cambodia and Kenya as examples.
• Asia and the Pacific region represent 83% of the
opened accounts in developing countries, which
is equivalent to 17 accounts for 100 persons.
• In Nov.1997, more than 2000 delegates from
100 countries gathered at a Microcredit Summit
in Washington, DC, with the goal of reaching
100 million of the world's poorest families, with
credit for self-employment and other financial
and business services by the year 2005.
The Economic and Social Council
• of the United Nations proclaimed the year 2005
as the International Year of Microcredit to call
for building inclusive financial sectors and
strengthening the powerful, but often untapped,
entrepreneurial spirit existing in communities
around the world. There are five goals:
1.Assess and promote the contribution of
microfinance and microcredit to the MDGs.
2.Increase public awareness and understanding of
as vital parts of the development equation.
3.Promote inclusive financial sectors.
4.Support sustainable access to financial services.
5. Encourage innovation and new partnerships by
promoting and supporting strategic partnerships
to build and expand the outreach and success of
microcredit and microfinance for all.
 Web 2.0 and Microfinance Merger
• Kiva.org, was the first person-to-person microlending Website that enabled an individual to
lend money to a micro-entrepreneur in the
developing world. This came to be known as
"the merger between Microfinance and Web
2.0" due to its ability to create a transparent,
connective and affordable option for anyone on
the Internet to lend directly to the working poor.
• Kiva is non-profit as it's very difficult to
become a SEC-registered broker/dealer.
• MicroPlace.com, a wholly-owned subsidiary of
eBay, was launched on October 2007. The big
difference between MicroPlace and Kiva is that
loans will be securitized.
• I.e., lenders invest in microloans by purchasing
securities (potentially tradable) and will earn
interest. Funds generated by these sales are then
invested in microcredit institutions around the
world. MFIs, in turn, solicit clients, make loans
and collect payments.
• Once client payments are in, the institutional
investors receive their loan (plus interest) who
can then pay back their investors.
Fundamental Principles
Savings|investment as preferable aid
• Independent borrowers earn the dignity and
lasting self-confidence associated with
responsible loan repayment. Institutional
managers are more careful to ensure borrower
success and generally perform better when there
are risks involved.
Entrepreneurial talent and energy are scarce
invaluable resources for economic growth
• Our economies cannot afford not to find and
develop independently responsible entrepreneurs
and public bankers who are financial critical
thinkers. These individuals can be attracted to
the microcredit industry, but they are individuals
with options, they will not risk their future on
short-term or unpredictable bureaucratic support.
Traditional private banks should not be
expected to offer microcredit
• Existing banks with a traditional operating
philosophy typically have significant
investments in facilities and costly operating
structures. Because of the significant overhead
of such banking operations, these bank
operations naturally gravitate to large, profitable
transactions with affluent borrowers.
A new generation of banking institutions and
professionals to run them is arising
• Banking institutions motivated by a less myopic
vision of profitably serving the common good
can be capitalized for the primary purpose of
entry-level economic development. By lowering
the transaction costs through institutional
specialization and innovation in delivery
systems, they will be able to operate profitably
in markets characterized by very small
transaction sizes and less affluent clients.
Poor entrepreneurs possess the same
survival skills as the toughest, most affluent
business operators
• Poor entrepreneurs are not only prebankable,
they represent the population of those
individuals who will be aggressively pursued as
successful, very affluent captains of enterprise in
10, 25 or 50 years from now.
A radically efficient, large-scale, new
banking operating infrastructure required
• Simply modifying old methods will not
successfully expand poor people's participation
in their country's economy. Investment in selfsustaining institutions that finance poor residents
is a comparatively cost-effective use of scarce
subsidies for economic development.
• The costs of doing research in the microcredit
and microenterprise areas are extremely low
compared to other strategies to stimulate
economic development such as tax abatement or
continued support for welfare programs.
Beyond enterprise lending and savings
• Microfinance is expanding beyond its roots in
savings and business lending and now offers
other forms of financial services, including most
notably insurance and housing microfinance.
• Microfinance offers the promise that it could
eventually evolve into a specialized form of
banking catering to economically active poor
people who currently happen to be unbanked.
• Some new microfinance focused-organizations,
for instance the Development Innovations Group
(DIG), have embraced this more expanded
vision of microfinance and speak of financial
services for the poor or of development finance,
rather than of microfinance.
Strengths
• In the past few years, savings-led microfinance
has gained recognition as an effective way to
bring very poor families low-cost financial
services. E.g., in India NABARD finances more
than 500 banks that on-lend funds to self-help
groups (SHGs) which comprise twenty or fewer
members, of whom the majority are women
from the poorest castes and tribes.
• Members save small amounts of money, as little
as a few rupees a month in a group fund.
Members may borrow from the group fund for a
variety of purposes ranging from household
emergencies to school fees.
• As SHGs prove capable of managing their funds
well, they may borrow from a local bank to
invest in small business or farm activities.
• Banks typically lend up to four rupees for every
rupee in the group fund. Groups pay a
reasonable 11-12% annual rate of interest.
• Nearly 1.4 million SHGs comprising
approximately 20 million women now borrow
from banks, which makes the Indian SHG-Bank
Linkage model the largest microfinance program.
• Similar programs are evolving in Africa and
Southeast Asia with the assistance of
Opportunity International, Catholic Relief
Services, CARE, APMAS, Oxfam, etc.
• Microfinancing also helps in the development of
an economy by giving everyday people the
chance to establish a sustainable means of
income. Eventual increases in disposable income
will lead to economic development and growth.
Criticism
• Gina Neff of the Left Business Observer has
described the microcredit movement as a
privatization of public safety-net programs.*
• Neff maintains that the success of the
microcredit model has been judged
disproportionately from a lender's perspective
(repayment rates, financial viability) and not
from that of the borrowers.
• E.g., the Grameen Bank's high repayment rate
does not reflect the number of women who are
repeat borrowers and have become dependent on
loans for household expenditures rather than
capital investments.
• Studies of microcredit programs have found that
women often act merely as collection agents for
their husbands and sons, such that the men spend
the money themselves while women are saddled
with the credit risk (and are kept out of waged
work and pushed into the informal economy).
• Bangladesh's Finance and Planning Minister M.
Saifur Rahman charges that some microfinance
institutions use excessive interest rates.
• Many studies have shown that risks like sickness,
natural disaster and overindebtedness are a
critical dimension of poverty, and that very poor
people rely heavily on informal savings to
manage these risks.*
• It might be expected that MFIs would provide
safe, flexible savings services to this population,
but they have been very slow to do so (with
exceptions like Grameen II). Some argue that
they are overly dependent on external capital.
• E.g., a study in Bolivia in 2003 found that MFIs
were very slow to deliver quality microsavings
services because of easy access to cheaper forms
of external capital. Global data tables from The
Microbanking Bulletin show that savings
represent a small source of funds for microcredit
institutions in most developing nations.
Role of Developing Country, a recent Forbes
ranking
• Forbes named seven India MFIs in the first ever
list of world's top 50, highest for a country.*
• Bangalore-based Bandhan was at the second
position. Bandhan, as well as two other Indian
MFIs, Microcredit Foundation of India (13th)
and Saadhana Microfin Society (15th), have
been placed even above Bangladesh-based
Grameen Bank (17th, topped by another
Bangladesh-based institution ASA).**
• India, along with Bangladesh, are jointly home
to the maximum number of MFIs to be featured
in the list. Among others, there are five from
Bosnia and Herzegovina, four each from
Morocco and Peru, three from Colombia and
two each from Equador, Ethiopia and Serbia.
• One each from 15 other countries, including
Russia, Pakistan, Mexico and Brazil have also
been named in the list.
• The magazine said that the list was made after
going through data available with the
Microfinance Information Exchange and the
analysis from rating firms Micro-Credit Ratings
International Limited and MicroRate.
• "Each microfinance institution earned scores in
four equally weighted categories -- scale,
efficiency, portfolio risk and profitability.
Rankings were then based on the combined
average score of those four categories".
• The ranking was based on six key
variables: gross loan portfolio, operating
expense, operating expenses divided by
the average number of active borrowers
as a percentage of gross national income
per capita, the outstanding balance of
loans overdue by more than 30 days as a
per cent of gross loan portfolio, return on
assets, and return on equity.
Credit Rating Agencies (CRAs)
Code of Conduct Fundamentals
IOSCO’s Technical Committee published
a Statement of Principles Regarding the
Activities of Credit Rating Agencies in
September 2003.*
• Designed to be a useful tool for securities
regulators, rating agencies and others wishing to
articulate the terms and conditions under which
CRAs operate and the manner in which opinions
of CRAs should be used by market participants.
• Laid out high-level objectives to improve
investor protection and the fairness, efficiency
and transparency of securities markets and
reduce systemic risk.
• To take into account the different market, legal
and regulatory circumstances in which CRAs
operate, and the varying size and business
models of CRAs, the manner in which the
Principles were to be implemented was left open.
• A variety of mechanisms could be used,
including both market mechanisms & regulation.
• Along with the Principles, the Committee also
published a Report on the Activities of Credit
Rating Agencies that outlined the activities of
CRAs, the types of regulatory issues that arise
relating to these activities, and how the
Principles address these issues.*
• Highlighted the growing and sometimes
controversial importance placed on CRA
assessments and opinions, and found that, in
some cases, CRAs activities are not always well
understood by investors and issuers alike.
• CRAs typically are subject to little formal
regulation or oversight in most jurisdictions,
concerns have been raised regarding the manner
in which CRAs protect the integrity of the rating
process, ensure that investors and issuers are
treated fairly, and safeguard confidential
material information provided them by issuers.
• The Code Fundamentals offer a set of robust,
practical measures that serve as a guide to and a
framework for implementing the Principles’
objectives.*
• The fundamentals should be included in
individual CRA codes of conduct, and the
elements contained in the Code Fundamentals
should receive the full support of CRA
management and be backed by thorough
compliance and enforcement mechanisms.
• CRAs and regulators should consider whether or
not additional measures may be necessary in a
specific jurisdiction.
• Not designed to be rigid or formulistic, but to
offer a degree of flexibility in how these
measures are incorporated into the individual
codes of conduct.
• CRAs should disclose how each provision of the
Code Fundamentals is addressed in the CRA’s
own code of conduct, explain if and how their
own codes of conduct deviate from the Code
Fundamentals and how such deviations
nonetheless achieve the objectives laid out.
Should keep in mind that the laws and
regulations of the jurisdictions in which they
operate vary and take precedence.*
• Permit market participants and regulators to
draw their own conclusions about whether the
CRA has implemented the Code Fundamentals
to their satisfaction, and to react accordingly.
• Do not address the equally important obligations
issuers have of cooperating with and providing
accurate and complete information to the
marketplace and the CRAs.
Terms
• Apply to any CRA and any person employed by
a CRA in either a full-time or part-time capacity.
• A “credit rating” is an opinion regarding the
creditworthiness of an entity, a credit
commitment, a debt or debt-like security or an
issuer of such obligations expressed using an
established and defined ranking system.
• Not recommendations to purchase, sell, or hold
any security.
• CRAs should endeavor to issue opinions that
help reduce the asymmetry of information that
exists between borrowers (and debt and debt-like
securities issuers) and lenders (and the
purchasers of debt and debt-like securities).
• Stale ratings that fail to reflect changes to an
issuer’s financial condition or prospects may
mislead market participants. Likewise, conflicts
of interest or other undue factors – internal and
external – that might, or even appear to,
impinge upon the independence of a rating
decision can seriously undermine a CRA’s
credibility.
1. Quality and Integrity of the Rating
Process
A. Quality of the Rating Process
1.1 The CRA should adopt, implement and enforce
written procedures to ensure that the opinions
it disseminates are based on a thorough
analysis of all information known to the CRA
that is relevant to its analysis according to the
CRA’s published rating methodology.
1.2 Should use rating methodologies that are
rigorous, systematic and, where possible, result
in ratings that can be subjected to some form of
objective validation based on historical
experience.
1.3 In assessing an issuer’s creditworthiness,
analysts involved in the preparation or review of
any rating action should use methodologies
established by the CRA. Analysts should apply a
given methodology in a consistent manner, as
determined by the CRA.
1.4 Credit ratings should be assigned by the CRA
and not by any individual analyst employed by
the CRA; ratings should reflect all information
known, and believed to be relevant, to the CRA,
consistent with its published methodology; and
the CRA should use people who, individually or
collectively have appropriate knowledge and
experience in developing a rating opinion for the
type of credit being applied.
1.5 Should maintain internal records to support its
credit opinions for a reasonable period of time
or in accordance with applicable law.
1.6 The CRA and its analysts should take steps to
avoid issuing any credit analyses or reports that
contain misrepresentations or are otherwise
misleading as to the general creditworthiness of
an issuer or obligation.
1.7 Should ensure that it has and devotes sufficient
resources to carry out high-quality credit
assessments of all obligations and issuers it
rates. When deciding whether to rate or continue
rating an obligation or issuer, it should assess
whether it is able to devote sufficient personnel
with sufficient skill sets to make a proper rating
assessment, and whether its personnel likely will
have access to sufficient information needed in
order make such an assessment.
1.8 Should structure its rating teams to promote
continuity and avoid bias in the rating process.
B. Monitoring and Updating
1.9 Except for ratings that clearly indicate they do
not entail ongoing surveillance, once a rating
is published the CRA should monitor on an
ongoing basis and update the rating by: a.
regularly reviewing the issuer’s
creditworthiness; b. initiating a review of the
status of the rating upon becoming aware of
any information that might reasonably be
expected to result in a rating action (including
termination of a rating), consistent with the
applicable rating methodology; and, c.
updating on a timely basis the rating, as
appropriate, based on the results of review.
1.10 Where a CRA makes its ratings available to
the public, the CRA should publicly announce if
it discontinues rating an issuer or obligation.
Where a CRA’s ratings are provided only to its
subscribers, the CRA should announce to its
subscribers if it discontinues rating an issuer
or obligation. In both cases, continuing
publications by the CRA of the discontinued
rating should indicate the date the rating was
last updated and the fact that the rating is no
longer being updated.
C. Integrity of the Rating Process
1.11 The CRA and its employees should comply
with all applicable laws and regulations
governing its activities in each jurisdiction in
which it operates.
1.12 The CRA and its employees should deal fairly
and honestly with issuers, investors, other
market participants, and the public.
1.13 The CRA’s analysts should be held to high
standards of integrity, and the CRA should not
employ individuals with demonstrably
compromised integrity.
1.14 The CRA and its employees should not, either
implicitly or explicitly, give any assurance or
guarantee of a particular rating prior to a rating
assessment. This does not preclude a CRA from
developing prospective assessments used in
structured finance and similar transactions.
1.15 Should institute policies and procedures that
clearly specify a person responsible for the
CRA’s and the CRA’s employees’ compliance
with the provisions of the CRA’s code of conduct
and with applicable laws and regulations. This
person’s reporting lines and compensation
should be independent of the CRA’s rating
operations.
1.16 Upon becoming aware that another employee
or entity under common control with the CRA is
or has engaged in conduct that is illegal,
unethical or contrary to the CRA’s code of
conduct, a CRA employee should report such
information immediately to the individual in
charge of compliance or an officer of the CRA,
as appropriate, so proper action may be taken. A
CRA’s employees are not necessarily expected to
be experts in the law. Nonetheless, its employees
are expected to report the activities that a
reasonable person would question. Any CRA
officer who receives such a report from a CRA
employee is obligated to take appropriate action,
as determined by the laws and regulations of the
jurisdiction and the rules and guidelines set
forth by the CRA.CRA management should
prohibit retaliation by other CRA staff or by the
CRA itself against any employees who, in good
faith, make such reports.
2. CRA Independence and Avoidance of
Conflicts of Interest
A. General
2.1 Should not forbear or refrain from taking a
rating action based on the potential effect
(economic, political, or otherwise) of the action
on the CRA, an issuer, an investor, or other
market participant.
2.2 The CRA and its analysts should use care and
professional judgment to maintain both the
substance and appearance of independence
and objectivity.
2.3 The determination of a credit rating should be
influenced only by factors relevant to the credit
assessment.
2.4 The credit rating a CRA assigns to an issuer or
security should not be affected by the existence
of or potential for a business relationship
between the CRA (or its affiliates) and the issuer
(or its affiliates) or any other party, or the nonexistence of such a relationship.
2.5 Should separate, operationally and legally, its
credit rating business and CRA analysts from
any other businesses of the CRA, including
consulting businesses, that may present a
conflict of interest. The CRA should ensure that
ancillary business operations which do not
necessarily present conflicts of interest with the
CRA’s rating business have in place procedures
and mechanisms designed to minimize the
likelihood that conflicts of interest will arise.
B. CRA Procedures and Policies
2.6 Should adopt written internal procedures and
mechanisms to (1) identify, and (2) eliminate,
or manage and disclose, as appropriate, any
actual or potential conflicts of interest that may
influence the opinions and analyses the CRA
makes or the judgment and analyses of the
individuals the CRA employs who have an
influence on ratings decisions. The CRA’s code
of conduct should also state that the CRA will
disclose such conflict avoidance and
management measures.
2.7 The CRA’s disclosures of actual and potential
conflicts of interest should be complete, timely,
clear, concise, specific and prominent.
2.8 Should disclose the general nature of its
compensation arrangements with rated entities.
Where a CRA receives from a rated entity
compensation unrelated to its ratings service,
such as compensation for consulting services,
the CRA should disclose the proportion such
non-rating fees constitute against the fees the
CRA receives from the entity for ratings services.
2.9 The CRA and its employees should not engage
in any securities or derivatives trading
presenting conflicts of interest with the CRA’s
rating activities.
2.10 In instances where rated entities (e.g.,
governments) have, or are simultaneously
pursuing, oversight functions related to the CRA,
the CRA should use different employees to
conduct its rating actions than those employees
involved in its oversight issues.
C.CRA Analyst and Employee Independence
2.11 Reporting lines for CRA employees and their
compensation arrangements should be
structured to eliminate or effectively manage
actual and potential conflicts of interest. The
CRA’s code of conduct should also state that a
CRA analyst will not be compensated or
evaluated on the basis of the amount of revenue
that the CRA derives from issuers that the
analyst rates or with which the analyst
regularly interacts.
2.12 Should not have employees who are directly
involved in the rating process initiate, or
participate in, discussions regarding fees or
payments with any entity they rate.
2.13 No CRA employee should participate in or
otherwise influence the determination of the
CRA’s rating of any particular entity or
obligation if the employee:
a. Owns securities or derivatives of the rated
entity, other than holdings in diversified
collective investment schemes;
b. Owns securities or derivatives of any entity
related to a rated entity, the ownership of which
may cause or may be perceived as causing a
conflict of interest, other than holdings in
diversified collective investment schemes;
c. Has had a recent employment or other
significant business relationship with the rated
entity that may cause or may be perceived as
causing a conflict of interest;
d. Has an immediate relation (i.e., a spouse,
partner, parent, child, or sibling) who currently
works for the rated entity; or
e. Has, or had, any other relationship with the
rated entity or any related entity thereof that
may cause or may be perceived as causing a
conflict of interest.
2.14 The CRA’s analysts and anyone involved in
the rating process (or their spouse, partner or
minor children) should not buy or sell or engage
in any transaction in any security or derivative
based on a security issued, guaranteed, or
otherwise supported by any entity within such
analyst’s area of primary analytical
responsibility, other than holdings in diversified
collective investment schemes.
2.15 CRA employees should be prohibited from
soliciting money, gifts or favors from anyone
with whom the CRA does business and should be
prohibited from accepting gifts offered in the
form of cash or any gifts exceeding a minimal
monetary value.
2.16 Any CRA analyst who becomes involved in
any personal relationship that creates the
potential for any real or apparent conflict of
interest
(including, for example, any personal
relationship with an employee of a rated entity
or agent of such entity within his or her area of
analytic responsibility), should be required to
disclose such relationship to the appropriate
manager or officer of the CRA, as determined
by the CRA’s compliance policies.
3. CRA Responsibilities to the Investing
Public and Issuers
A.Transparency and Timeliness of Ratings
Disclosure
3.1 Should distribute in a timely manner its
ratings decisions regarding the entities and
securities it rates.
3.2 Should publicly disclose its policies for
distributing ratings, reports and updates.
3.3 Should indicate with each of its ratings when
the rating was last updated.
3.4 Except for “private ratings” provided only to
the issuer, the CRA should disclose to the public,
on a non-selective basis and free of charge, any
rating regarding publicly issued securities, or
public issuers themselves, as well as any
subsequent decisions to discontinue such a
rating, if the rating action is based in whole or
in part on material non-public information.
3.5 Should publish sufficient information about its
procedures, methodologies and assumptions
(including financial statement adjustments that
deviate materially from those contained in the
issuer’s published financial statements) so that
outside parties can understand how a rating was
arrived at by the CRA. This information will
include (but not be limited to) the meaning of
each rating category and the definition of
default or recovery, and the time horizon the
CRA used when making a rating decision.
3.6 When issuing or revising a rating, the CRA
should explain in its press releases and reports
the key elements underlying the rating opinion.
3.7 Where feasible and appropriate, prior to
issuing or revising a rating, the CRA should
inform the issuer of the critical information and
principal considerations upon which a rating
will be based and afford the issuer an
opportunity to clarify any likely factual
misperceptions or other matters that the CRA
would wish to be made aware of in order to
produce an accurate rating. The CRA will duly
evaluate the response. Where in particular
circumstances the CRA has not informed the
issuer prior to issuing or revising a rating, the
CRA should inform the issuer as soon as
practical thereafter and, generally, should
explain the reason for the delay.
3.8 In order to promote transparency and to
enable the market to best judge the performance
of the ratings, the CRA, where possible, should
publish sufficient information about the
historical default rates of CRA rating categories
and whether the default rates of these categories
have changed over time, so that interested
parties can understand the historical
performance of each category and if and how
rating categories have changed, and be able to
draw quality comparisons among ratings given
by different CRAs. If the nature of the rating or
other circumstances make a historical default
rate inappropriate, statistically invalid, or
otherwise likely to mislead the users of the
rating, the CRA should explain this.
3.9 For each rating, the CRA should disclose
whether the issuer participated in the rating
process. Each rating not initiated at the request
of the issuer should be identified as such. The
CRA should also disclose its policies and
procedures regarding unsolicited ratings.
3.10 Because users of credit ratings rely on an
existing awareness of CRA methodologies,
practices, procedures and processes, the CRA
should fully and publicly disclose any material
modification to its methodologies and significant
practices, procedures, and processes. Where
feasible and appropriate, disclosure of such
material modifications should be made prior to
their going into effect. The CRA should carefully
consider the various uses of credit ratings before
modifying its methodologies, practices,
procedures and processes.
B.The Treatment of Confidential Information
3.11 Should adopt procedures and mechanisms to
protect the confidential nature of information
shared with them by issuers under the terms of a
confidentiality agreement or otherwise under a
mutual understanding that the information is
shared confidentially.
Unless otherwise permitted by the confidentiality
agreement and consistent with applicable laws
or regulations, the CRA and its employees
should not disclose confidential information in
press releases, through research conferences, to
future employers, or in conversations with
investors, other issuers, other persons, or
otherwise.
3.12 Should use confidential information only for
purposes related to its rating activities or
otherwise in accordance with any confidentiality
agreements with the issuer.
3.13 CRA employees should take all reasonable
measures to protect all property and records
belonging to or in possession of the CRA from
fraud, theft or misuse.
3.14 CRA employees should be prohibited from
engaging in transactions in securities when they
possess confidential information concerning the
issuer of such security.
3.15 In preservation of confidential information,
CRA employees should familiarize themselves
with the internal securities trading policies
maintained by their employer, and periodically
certify their compliance as required by such
policies.
3.16 CRA employees should not selectively
disclose any non-public information about
rating opinions or possible future rating actions
of the CRA, except to the issuer or its designated
agents.
3.17 CRA employees should not share confidential
information entrusted to the CRA with
employees of any affiliated entities that are not
CRAs. CRA employees should not share
confidential information within the CRA except
on an “as needed” basis.
3.18 CRA employees should not use or share
confidential information for the purpose of
trading securities, or for any other purpose
except the conduct of the CRA’s business.
4.Disclosure of the Code of Conduct and
Communication with Market Participants
4.1 Should disclose to the public its code of
conduct and describe how the provisions of its
code of conduct fully implement the provisions of
the IOSCO Principles Regarding the Activities of
Credit Rating Agencies and the IOSCO Code of
Conduct Fundamentals for Credit Rating
Agencies. If a CRA’s code of conduct deviates
from the IOSCO provisions, the CRA should
explain where and why these deviations exist,
and how any deviations nonetheless achieve the
objectives contained in the IOSCO provisions.
Should also describe generally how it intends to
enforce its code of conduct and should disclose
on a timely basis any changes to its code of
conduct or how it is implemented and enforced.
4.2 Should establish a function within its
organization charged with communicating with
market participants and the public about any
questions, concerns or complaints that the CRA
may receive. The objective of this function
should be to help ensure that the CRA’s officers
and management are informed of those issues
that the CRA’s officers and management would
want to be made aware of when setting the
organization’s policies.