Institutionalising Ethical Conduct
and Implementing Whistle
Blowing: Issues and Challenges
A/P Mak Yuen Teen
Co-Director, Corporate Governance and
Financial Reporting Centre
CPA Australia/ICPAS Dinner
Talk, 3 January 2006
© Mak Yuen Teen. Certain materials used in this presentation are provided by iCounsel Pte
Ltd and used with permission.
Why Develop a Code of Ethics/Conduct?
• Regulatory requirements/best practice
recommendations (U.S., Australia)
• Compliance with the spirit of the law and
minimise reputation risk from ethical
breaches
• Institutionalising an ethical culture
• Building sustainable long-term shareholder
value
Code of Ethics/Conduct:
Regulatory Initiatives
• US:
Sarbanes-Oxley Act requires companies
to disclose whether they have adopted a
code of ethics that applies to the
company’s senior financial officers and, if
not, to explain why
NYSE rules now require that a “code of
business conduct and ethics for directors,
officers and employees” be disclosed. Any
waivers of the code should also be
disclosed.
Code of Ethics/Conduct: Regulatory
Initatives
• Australia:
The ASX recommends the establishment of
a code of conduct which should be made
publicly available.
Key Steps in Developing and
Implementing a Code of Ethics/Conduct
Assess current
ethical
culture/program
Identify desired
core values
Writing the code
Identify key
elements
Consultation
process
Implementation
process
Key Steps in Developing and
Implementing a Code of Ethics/Conduct
1. Assess your organisation’s present ethical
culture and program to identify gaps between
current practices and best practices
2. Identify relevant core values desired by your
organisation and stakeholders
–
–
e.g., SingTel’s core values are “customer focus,
challenger spirit, teamwork, integrity and personal
excellence”
BP’s core values are “integrity, honest dealing,
treating everyone with respect and dignity, striving
for mutual advantage and contributing to human
progress”
Key Steps in Developing and
Implementing a Code of Ethics/Conduct
3. Identify key elements, e.g.,
–
–
–
–
–
–
ensure interests of key stakeholders are taken into
consideration
ensure the program covers all levels, including
directors, management, employees (how about
suppliers and business partners?)
identify all key legal/ethical issues arising from the
company’s operations, both locally and overseas
identify the program “champion”?
form ethics committee
ensure process for communicating, training,
monitoring, enforcing and updating is in place
Key Steps in Developing and
Implementing a Code of Ethics/Conduct
4. Writing the code, e.g.,
–
–
–
–
use plain personal language and positive tones
focusing on what should be done, not what should
not be done
use a user friendly format which is well organised
and structured, and easy for employees to
understand and find answers to situations faced
be specific as to problems and issues facing the
organisation; give examples including problems
faced by organisation in the past
include a duty to act honestly, fairly and with
integrity to set a higher standard than just complying
with letter and spirit of laws and regulations
Key Steps in Developing and
Implementing a Code of Ethics/Conduct
4. Writing the code, e.g.,
–
–
–
–
–
–
provide examples of ethical dilemmas and asking
questions like “how would I and the organisation
look if my actions appear in tomorrow’s Business
Times front page?”
provide tools for resolving ethical dilemmas, e.g.,
checklists, prescribed steps, list of questions to ask
oneself before making decision
provide contact persons that employees can
approach before making decision if they have
doubts
make code part of employment contract
make reporting of ethical breaches part of employee
duty and provide secure avenues for reporting
breaches (whistleblowing)
specify enforcement actions for unethical behaviour
Key Steps in Developing and
Implementing a Code of Ethics/Conduct
5. Consultation process
–
consult with employees, stakeholders and overseas
units to ensure appropriate content, language, style
and format
6. Implementation process
–
–
–
introductory letter from CEO indicating board/top
management endorsement
circulate widely to all who are covered at least
annually and get them to acknowledge receipt and
commitment to adhere
publicise code to stakeholders (mention in annual
report; put code on website)
Walking the Talk: Ethics versus
Competence
Gu Yanfei tipped to be new CAO head [Business Times, 19
October 2005]
`She is the only one, at this point, who can effectively handle
relations between CAOHC and the Singapore team - a matter which
is key to CAO's future survival,’ a source told BT. `No one can
manage the concerns of both sides as well as she can.’ Sources,
however, also told BT that Gu may not be appointed chief executive
immediately or in the near future as she still faces criminal charges
relating to the CAO scandal. She was charged in June for breaching
her fiduciary duties as a director and for failing to disclose CAO's
huge options trading losses of US$550 million to the Singapore
Exchange. The maximum penalties are a fine of up to $250,000
and/or jail of up to seven years. Sources say it's likely that an interim
CEO will be appointed first, with Gu taking over only when her
charges are resolved - even if that means she will only become CEO
a year from now.
Walking the Talk: Ethics versus
Competence
Poll, SAICSA Dinner Talk, 8 December 2005 (76 responses
Walking the Talk: Ethics versus
Competence
Brilliant boss faces insider trading charges
[Business Times, 7 September 2005]
Brilliant said yesterday that Koh will continue with his current
duties as executive chairman and managing director. `The board
wishes to emphasise that the charges pertain to Mr Koh in his
personal capacity and do not affect the operations of Brilliant
which is not under any investigation,’ it said.
Walking the Talk: Ethics versus
Competence
Poll, SAICSA Dinner Talk, 8 December 2005 (76 responses
Walking the Talk: Ethics versus
Competence
Boeing fires CEO over relationship (www.cnn.com, 7 March
2005)
Boeing has ordered its Chief Executive Harry Stonecipher to step down
because of what the U.S. aircraft giant said was an improper
relationship with a female executive. The company said the female
executive, who has not been identified, did not report directly to
Stonecipher and that the relationship was consensual and had no effect
on the conduct of the company's business. But it said the relationship
violated Boeing's code of conduct… "the board concluded that the facts
reflected poorly on Harry's judgment and would impair his ability to lead
the company," …"The resignation was in no way related to the
company's operational performance or financial condition, both of
which remain strong," Boeing said in a statement. "However, the CEO
must set the standard for unimpeachable professional and personal
behavior. And the board determined this was the right and necessary
decision under the circumstances..(emphasis added)
Walking the Talk: Ethics versus
Competence
Poll, SAICSA Dinner Talk, 8 December 2005 (76 responses)
Walking the Talk: Ethics versus
Competence
• How many boards would actually fire their
CEO for breaching their code of conduct
if he is otherwise doing his job well?
• Would your organisation hire a CEO who
has been fired recently for unethical
conduct in a key leadership role?
• To institutionalise an ethical culture,
organisations must be ready to enforce it
against senior management and
directors, with no exceptions
Whistleblowing
• A broad definition of whistleblower:
– “one who reveals wrongdoing within an
organization to the public or to those in
positions of authority ” (Answers.com)
Whistleblowing
• Whistleblowing arrangements
increasingly seen to be an important
component of the corporate governance
framework of an organisation
• Why? Surveys and recent corporate
scandals show that more frauds are
uncovered through reports made by
whistleblowers than through activities
such as internal audits
Whistleblowing
• The importance of whistleblowing is
increasingly recognised:
– legislation to protect whistleblowers (e.g.,
Public Interest Disclosure Act 1998 in U.K.;
Sarbanes-Oxley Act 2002; Securities Industry
Act amendments in Malaysia)
Whistleblowing
– legislative provisions mandating
whistleblowing by certain individuals (e.g., the
auditor under Singapore and Malaysia
Companies Act; auditor under Malaysia
Securities Industry Act)
Whistleblowing
– rewards for whistleblowers by government
agencies or other organisations (e.g., IRAS,
Business Software Alliance)
– corporate governance codes (e.g., U.K.,
Australia, Singapore)
– companies’ codes of ethics/conduct
encouraging or even imposing a duty on
employees to report breaches
Whistleblowing – Sarbanes Oxley Act
• Sarbanes Oxley Act:
S. 301 requires the audit committee to
establish rules for (1) the treatment of
complaints received by the company regarding
accounting, internal accounting controls or
auditing matters, and (2) the confidential,
anonymous submission by employees of
concerns regarding questionable accounting
or auditing matters.
Section 307 proposed making all attorneys
(both in-house and outside counsel)
mandatory whistleblowers.
Whistleblowing – Sarbanes Oxley Act
S. 806 of the SOX contains civil
provisions that protect whistleblowers
employed by publicly traded companies
from discrimination.
S.1107 contains criminal provisions
prohibiting retaliation against employees
of both public and private companies
who whistle-blow to a law enforcement
officer – fine and/or imprisonment of up
to 10 years
Whistleblowing - U.K. Public Interest
Disclosure Act 1998
• U.K. – Public Interest Disclosure Act
1998 which covers public, private and
voluntary sectors
Whistleblowing - U.K. Public Interest
Disclosure Act 1998
Types of qualifying disclosures:
Qualifying disclosures are disclosures of
information which the worker reasonably believes
tends to show one or more of the following is
either happening now, has happened in the past,
or is likely to happen in the future
–
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a criminal offence
a breach of a legal obligation
a miscarriage of justice
a danger to the health or safety of any individual
damage to the environment
deliberate covering up of information which tends to
any of the above
Whistleblowing - U.K. Public
Interest Disclosure Act 1998
Protected disclosures:
– making a qualifying disclosures made to the
employer or through internal procedures, a
prescribed person, a legal adviser or a
Minister
– making a qualifying disclosure about an
exceptionally serious failure
– making a qualifying disclosure more
generally
– disclosure about health and safety matters
Whistleblowing – Corporations Act
(Australia)
Who are protected:
– an officer or
– an employee of a company or
– a contractor or their employee who has a
contract to supply goods or services to the
company.
Whistleblowing – Corporations Act
(Australia)
What sort of protection:
– any retaliation against a whistleblower and
gives them a civil right, including seeking
reinstatement of employment.
– qualified privilege against defamation and
– precludes contractual or other remedies
being enforced including civil and criminal
liability for making the disclosure - secrecy
provisions in any employment contracts and
the like will not preclude whistleblowing.
Whistleblowing – Corporations Act
(Australia)
Protected disclosures:
– ASIC
– the company's auditor or a member of the
audit team
– a director secretary
– senior manager of the company
– another person authorised by the company
to receive revelations of this kind.
Whistleblowing – Corporations Act
(Australia)
Conditions for protection:
– give their name before making the disclosure,
and
– have reasonable grounds to suspect that their
revelation indicates the company or an officer
or employee has, or may have, contravened
the Corporations legislation (which includes
both the Corporations Act and the ASIC Act),
and
– act in good faith.
“Where a person has a malicious or secondary purpose in
making a disclosure, it is considered that the good faith
requirement would not be met.”
Corporate Governance Codes and
Whistleblowing
• The AC should review arrangements by
which staff of the company may, in
confidence,
raise
concerns
about
possible improprieties in matters of
financial reporting or other matters. The
AC’s objective should be to ensure that
arrangements are in place for the
independent investigation of such matters
and for appropriate follow up action.
(Revised Singapore Code, Guideline 11.7)
Telepoll, CAD Conference, Nov 23, 2005
Codes of Conduct and Whistleblowing
Source: BP Code of Conduct
Codes of Conduct and Whistleblowing
Source: Qantas Code of Conduct
Directors’ Duties and Whistleblowing
S.157. —(1) A director shall at all times act
honestly and use reasonable diligence in the
discharge of the duties of his office.
S. 157C(1) - Use of information and advice
Directors’ Duties and Whistleblowing
S. 157C(2) - Subsection (1) shall apply to a
director only if the director —
– (a) acts in good faith;
– (b) makes proper inquiry where the need for
inquiry is indicated by the circumstances;
and
– (c) has no knowledge that such reliance is
unwarranted.
Employee Duty and Whistleblowing
"For those who argue that employees owe strict loyalty to the
company, whistleblowing seems to be an act of extreme disloyalty.
It puts at risk the reputation of the firm. But this seems to be based
on a narrow view of loyalty as if it demands that we do whatever
the company or another individual believes to be in their best
interest...Loyalty cannot imply that we should not report the
unethical conduct of others... This may imply for an employee that
he or she is most loyal when trying to prevent something that could
lead to harm for customers, shareholders, or the general public. If
there is no proper response internally, or if by the nature of the
case, it is not possible to find an internal remedy, then it would
seem ethically correct to blow the whistle. In fact, sometimes there
can be a duty to do so. It would be obligatory for an employee to
blow the whistle when the level of harm to others is serious, and
the employee has clear evidence of the unethical practice that has
led to this. This could, for example, be in terms of product safety or
severe financial hardship for others.“
Michael Walsh, "Whistleblowing: betrayal or public duty?,"
http://www.erc.org.au
Telepoll, CAD Conference, Nov 23, 2005
Key Considerations in Implementing
Whistleblowing
• How to submit complaints and who to
submit to (e.g., legal/compliance, audit
committee, external hotlines)
• Anonymity versus non-anonymity
• Improprieties which are covered (accounting
irregularities, theft, fraud,
corruption/dishonesty, harassment,
unethical behaviour, improper conduct,
workplace safety hazards, breaches of
legislation)
Key Considerations in Implementing
Whistleblowing
• Investigation, follow up and reporting
procedures
• Types of prohibited reprisals (e.g.,
discrimination, harassment, intimidation,
demotion, termination, etc.)
• Policy regarding whistleblower’s immunity
from disciplinary proceedings and
civil/defamation claims
Whistleblowing: Case Study 1
“I am the finance manager of a listed company (SGX). The management ( who is
also the controlling shareholders) induced or influenced my accountant to
manipulate the financial reports without my knowledge. I have reasons to
believe that it was carried out for almost a year and past result announcement,
monthly reporting to the Board and information provided to the bankers
might have been wrong. The present structure are prone to internal control
weakness as management are able to override existing controls, policies and
procedures.
Have informed the chairman ( who have deemed substantial shareholding via
another listed company -SGX) who reprimanded them and he is unlikely to
pursue the matter further. Perhaps he will divest the shareholdings when time
is ripe.
We are due to report our quarterly result in a month time and I discovered
recently that the profit are overstated. If I report to the Independent directors
and if they chose to remain passive, my career will be at stake. The
management played a critical role and are likely to continue in office.
Any advice?”
Whistleblowing: Case Study 2
Sequence of events:
• Former manager informed Board Chairman
about alleged wrongdoings involving
potentially serious conflict of interest
involving CEO. Alleged that she was “forced
out” of company when she raised questions.
Substantial evidence which appear to
support her allegations was provided.
Whistleblowing: Case Study 2
• Board agreed that the matter needs to be
thoroughly investigated and appointed an
Investigations Committee (IC) to oversee
investigations, and to report and make
recommendations to the Board
- range of initial reactions from Board members
- does duty of care compel the board to do a proper
investigation?
- “doing the right thing”
• Board also approved appointment of an
accounting firm to do an independent
investigation and to report to IC
Whistleblowing: Case Study 2
• Whistleblower was informed that her allegations
will be investigated
• IC interviewed the CEO
– need to be handled sensitively to ensure natural
justice is served
– Board may need to work with CEO again if allegations
untrue
– need to decide status of CEO while investigations
were proceeding (and contingency plans if necessary)
• Chairman briefed Heads (CEO allowed to
continue working) before accounting firm
commenced investigations
Whistleblowing: Case Study 2
• IC and accounting firm prepared reports and
presented findings to the Board
• Board approved list of questions prepared
by IC, based on the findings, for CEO to
address
• Second legal opinion sought in terms of
actions that could be taken
Whistleblowing: Case Study 2
• Special Board meeting was held to consider
responses and make decisions on actions to
take if any (plan A, plan B, etc.)
• what kinds of breach, if any (law? employment
contract/code of conduct? good governance and
management practices?)
• Board communicated findings and CEO
resigned
Whistleblowing: Case Study 2
• Interim management team appointed
• Whistleblower informed that CEO had
resigned and case is closed
Powerpoint presentation can be downloaded
from http://www.cgfrc.nus.edu.sg