Relationship between Law and Ethics, and the Significance
of the Federal Sentencing Guidelines for Organizations
2 May 03
and Ethics. If the aim of ethics
is always the harmony, intensity, and vividness that involves
the perfection of importance for that occasion, the effective
boundaries of those occasions are set by social values imbedded
in treaties, constitutions, laws, judicial decisions, and
regulations represent the minimum standards for organizational
conduct. Moreover, all laws that deal with safety, health
and the legal process itself have ethical foundations. Ethics
also deals with many matters that the law addresses inadequately-or
not at all. History is replete with unethical laws. Apartheid
in South Africa is but one example. Laws subjugating women
Standards relating especially to human rights, labor
standards, and children may, under certain circumstances
and in certain countries, have the force of domestic law.
is required of an organization than reciting that all its
members of the organization will abide by the law. An effective
ethics program must harmonize the values of the organization
with the values embedded in the law. Where they cannot be
harmonized, it must be able to guide policy-makers as to
how to act when the two conflict.
figure above depicts, the law also deals with some matters
that are either not the concern of ethics or are themselves
unethical. Some regulations might, for example, even be
unethical viewed from the organization's perspective. This
is especially true in a global context. Other laws, such
as the qui tam or "whistleblowing" provisions, might
actually work against an organization designing an effective
approach to ethical management combines a concern for the
law with a sensitivity to the organization's place in the
world and its general obligation to be responsible for its
judgments and actions.
It is doubtful that an organization can achieve ethical
behavior without knowledge of the law or legal compliance
without ethics. An effective ethics program, therefore,
must address what is demanded by the values of the organization
as well as what is demanded by the law. It must also be
able to guide policy-makers as to how to act when the two
and Risk Management. Leaders who consider ethics to
be separate from law place themselves and their organizations
at risk. To not have an effective ethics/compliance program
is to place the organization at serious risk.
rule, the law imposes vicarious liability on an organization-that
is, liability without regard to the fault of the organization
as a whole-for wrongs committed by an employee in the course
or scope of employment.
moreover, is not limited to the organization alone. In a
landmark decision, In re Caremark International, Inc.,
the Delaware Court of Chancery warned that directors failing
to assure that an organization takes adequate compliance
measures can be held personally liable for subordinate wrongdoing.
The specific context of the Caremark decision was
failure to supervise the conduct of Caremark employees
engaged in kickbacks prohibited by the federal Anti-Referral
Payments Law. This decision marks a trend toward increased
director liability that includes the corporate governance
approach proposed in 1994 by the influential American Law
Sentencing Guidelines for Organizations. Another powerful
incentive for having an effective ethics program is the
Federal Sentencing Guidelines for Organizations. These guidelines
lay out a minimum framework for an effective ethics/compliance
program. Environmental and health care regulating agencies,
among others, are developing similar provisions. Any organization
whose ethical context includes major exposure to federal
law needs to consider these guidelines.
the United States Sentencing Commission promulgated guidelines
governing the imposition of sentences by Federal Judges
on organizational defendants. They impose harsh penalties
upon organizations whose employees or other agents
committed federal crimes. Penalties include restitution,
remedial orders, community service, and substantial fines.
were directed to consider three aggravating factors:
mitigating factors, which may reduce or eliminate the liability
of the organization, include:
Maintenance of an effective program to prevent and detect
violations of law.
of the offense.
cooperation in the investigation.
demonstrating recognition of, and affirmative acceptance
for, its criminal conduct.
guidelines encourage organizations to develop "effective
programs to prevent and detect violations of law," and prescribe
seven "types of steps" of an effective program (the complete
guidelines, as amended in 2004, are set forth in Appendix
Compliance Standards and Procedures that are reasonably
capable of reducing the prospect of criminal conduct.
Personnel assigned overall responsibility to oversee compliance
with such standards and procedures.
Care in Assignments that avoids delegating to individuals
whom the organization knew, or should have known, had
a propensity to engage in illegal activities.
Standards and Procedures by requiring participation in
training programs or by disseminating publications that
explain in a practical manner what is required.
and Auditing Systems and Reporting System established
by using monitoring and auditing systems and by having
in place and publicizing a reporting system whereby employees
and other agents can report criminal conduct without fear
Enforced through Appropriate Mechanisms, including, as
appropriate, discipline of individuals responsible for
the failure to detect an offense.
Response to an Offense by taking all reasonable steps
to respond appropriately to the offense and prevent further
similar offenses-including any necessary modification
of its program.
organization must also:
Self-report to the appropriate governmental agency.
applicable industry practice or the standards called for
by any governmental.
whether a program is effective, the court will also look
to the size of the organization, the likelihood that offenses
may occur because of the nature of its business, and its
Culture and the Australian Approach
above, the Federal Sentencing Guidelines take an essentially
formal program characteristic approach. Individual members
of the Commission recognize that more is required for an
effective program. See Murphy
The guidelines are also celebrating their 10 year anniversary,
and an ad hoc advisory panel has been appointed to make
recommendations for their revision to integrate lessons
it is impossible to design an effective ethics and compliance
program without understanding the context of the organization
and its organizational culture.
criminal code provision takes a less formal program
characteristics approach, and it looks more at the culture
of the organization itself. It is also deals wit corporate
liability, not just sentencing as does the Federal Sentencing
Guidelines. It is valuable to consider these provisions
as a minimal test of what corporate culture is required.