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Creating an Ethical Organization Environment

U.S. Federal Sentencing Guidelines: The 'Good Parenting' Statute

In speaking about the U.S. Federal Sentencing Guidelines that were put into effect 20 years ago by the United States Sentencing Commission (USSC), Supreme Court justice Stephen Breyer points to the purpose of the Guidelines which is create a system to build in greater fairness and honesty in sentencing. In seeking "greater fairness," Congress, acting in bipartisan fashion, intended to respond to complaints of unreasonable disparity in sentencing--that is, complaints that differences among sentences reflected not simply different offense conduct or different offender history, but the fact that different judges imposed the sentences.

An organization can become criminally liable for wrongdoing whenever an employee commits an offense within the scope of his/her employment, even if the act was contrary to company policy, so that the entire organization can be held criminally liable for that individual’s illegal actions. However, the Guidelines have built into them the ability to mitigate a fine by up to 95 percent if the organization can demonstrate that it had an effective compliance program. This is assuming prompt reporting and non-involvement of high level employees.

Under the Guidelines, organizations with ethics and compliance programs meeting defined standards earn credit toward reduced penalties if employees engage in wrongdoing – but organizations with substandard programs receive far tougher penalties.

According to the Ethics Research Center (ERC), the Guidelines encourage American businesses to create effective ethics and compliance programs that can empower companies to define and detect employee misconduct – and to move against it. The ERC is conducting a study of the effectiveness of the Guidelines and point out that they are rarely applied to large companies because their crimes are often being adjudicated in the courthouse where the Guidelines apply; rather, they’re being settled out of court through Deferred Prosecution Agreements (DPAs) or Non-Prosecution Agreements (NPAs).

The ERC study poses interesting questions: “The [Guidelines] incentivize corporations to self-police and aim high on ethics. If these incentives are not consistently applied in prosecutorial decisions, will the Guidelines become irrelevant? Without an incentive to promote ethical cultures, will executives lower the bar? And if so, will corporate misconduct increase?”

To address these questions, the ERC has assembled an Advisory Group of distinguished law enforcement officers, federal judges, prosecutors, academics and compliance/ethics professionals. This Advisory Group is examining the Guidelines, its successes and failures over the past 20 years, and opportunities for improvement. The purpose is to ensure that ethics and compliance remain a core discipline across corporate America. It will be interesting to learn the results from the study on these important issues when the final report is issued next year.

The criteria for an effective compliance program to mitigate sentences include:

  • Established policies and procedures to protect and detect non-compliance with regulations;
  • Management is proactive in overseeing the compliance program;
  • Employees who have engaged in some form of misconduct in the past are precluded from holding an authoritative position in the compliance program;
  • Effective communication of the compliance program to officers, so they can communicate and mandate them through the organization;
  • Monitoring and auditing of the compliance program and maintenance of an effective reporting system;
  • Effective enforcement of the program through incentives or disciplinary actions; and
  • Taking appropriate steps to prevent recurrence once noncompliance is discovered.

I like to view the Guidelines as a “good parenting statute.” An organization has an obligation to encourage ethical behavior on the part of its employees, provide an environment that supports such behavior, and build in sanctions for those who deviate from company norms.

In the current “Occupy Wall Street” environment where many question corporate accountability and the role of Wall Street in the financial meltdown, it is important for all organizations to reflect on what constitutes ethical behavior in the workplace. It starts with the tone at the top – top management must make it clear through word and deed that it won’t stand for self-serving behavior that places the interests of a few ahead of the public good.

Blog posted by Steven Mintz, aka Ethics Sage, on November 19, 2011