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The Relationship between Law and Ethics, and the Significance of the Federal Sentencing Guidelines for Organizations 2 May 03

 

Law 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. more

Governmental 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 are others. Visual

International Standards — relating especially to human rights, labor standards, and children — may, under certain circumstances and in certain countries, have the force of domestic law. more

More 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.

As the 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 ethics/compliance program.

An integrity-based 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 conflict. More

Ethics 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.

As a 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.

Liability, 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 Institute.

Federal 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.

In 1991, 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. More

Judges were directed to consider three aggravating factors:

  • Managerial involvement.
  • Prior criminal history.

    The legal vs. Integrity-based dichotomy helps us think about different approaches companies can take. . . . In the end, then, an integrated approach of law and ethics may be what is most needed.

    Winthrop M. Swenson Former General Counsel, United States Sentencing Commission

  • Obstruction of justice.

Four 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.
  • Self-reporting of the offense.
  • Full cooperation in the investigation.
  • Clearly demonstrating recognition of, and affirmative acceptance for, its criminal conduct.

The 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 1):

  • Compliance Standards and Procedures that are reasonably capable of reducing the prospect of criminal conduct.
  • High-level Personnel assigned overall responsibility to oversee compliance with such standards and procedures.
  • Due Care in Assignments that avoids delegating to individuals whom the organization knew, or should have known, had a propensity to engage in illegal activities.
  • Communicate Standards and Procedures by requiring participation in training programs or by disseminating publications that explain in a practical manner what is required.
  • Monitoring 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 of retribution.
  • Standards Enforced through Appropriate Mechanisms, including, as appropriate, discipline of individuals responsible for the failure to detect an offense.
  • Appropriate 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.

The organization must also:

  • Self-report to the appropriate governmental agency.
  • Follow applicable industry practice or the standards called for by any governmental.

In determining 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 prior history.

Corporate Culture and the Australian Approach

As described 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 and Steir. 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 learned.

In practice, it is impossible to design an effective ethics and compliance program without understanding the context of the organization and its organizational culture.

An Australian 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.

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