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Code of Ethics.

More insurers are hiring ethics officers to set and implement corporate mores.

When a middle-level manager for Nationwide Insurance Cos. was invited to attend a vendor's conference in Florida and needed guidance about whether to accept the Super Bowl tickets that came with the invitation, Nationwide's Office of Ethics had an answer.

'No," said Michael Flack, vice president of ethics and business practices. Nationwide's gift and entertainment policy prohibits the acceptance of expensive gifts.

The responsibilities of ethics officers don't stop there. Situations ranging from a lapse in judgment by a single employee to legal and financial catastrophes can result in the loss of millions of dollars in fines for businesses. One way that some major U.S. companies are protecting themselves against these potential losses is by hiring ethics officers.

Several insurers have hired ethics officers to protect themselves from potential allegations of wrongdoing and to educate their employees about codes of conduct and conflicts of interest. As of October 2000, insurance companies made up 8% of the 720-member Ethics Officer Association, a nonprofit organization dedicated to promoting ethical business practices. Privacy concerns prompted by financial-services reform are bringing ethics officers to the forefront. And at least one insurer is making the company's code of conduct available online to employees.

Ethics Officers Defined

The U.S. government's Defense Industry Initiative on Business Ethics and Conduct gave rise to the ethics officer role nearly two decades ago, after the defense industry was criticized on how it was handling contract negotiations with the federal government. "The government wanted certain standards to be in place, leading the industry to form the initiative. This is what led companies to set up the function of the ethics officer," said John O'Byrne, vice president of the office of business conduct at New York Life Insurance Co.

The Ethics Resource Center, an independent organization formed in 1992 to help individuals and institutions improve their ethical practices, defines an ethics officer as "someone who provides leadership and company-wide strategies to effectively integrate the corporation's ethics and compliance program and its value with all aspects of the company's operations, stakeholders and the communities in which it operates." This definition differs from the organization's 1986 version, which coined the position as a senior management level group or individual with overall responsibility for developing and/ or implementing corporate standards of ethical business conduct, said Michael G. Daigneault, the resource center's president.

"The difference is that [the new definition] incorporates more explicitly the notion of values. The emerging trends in ethics today are to go beyond just compliance; value is a very important aspect of it," Daigneault said.

Diversity Is Key

Ethics officers are responsible for ensuring that their companies have a serious commitment to and follow-through for ethical business. "We consider this to be a very important function. Their mandate is to make sure that ethical conduct is embedded in everything we do," said Michele Darling, executive vice president of corporate governance with Prudential Insurance Company of America. Prudential's ethics officer is a former chief medical officer who has served in that capacity for several years.

New York Life also has relied heavily on its ethics officers since the company's corporate office of business conduct was created in 1993. "When you have an area that is accountable for codifying corporate behavior throughout the enterprise, the benefit to the company is that you increase the likelihood of compliance if you have a clearly defined area and people know where to go," O'Byrne said. "The role of the ethics officer is to help formulate policy, communicate it, train people on it and then refine the policy as events warrant."

Prudential's ethics officer works with various corporate centers to increase understanding of ethical issues and generate a good collaborative impact on the enterprise in some of the critical areas they feel are important, Darling said. This individual also is responsible for formulating ethics policies and the company's code of conduct, in addition to coordinating training programs for employees to understand what ethical behaviors and conduct mean in context of the organization. "This is what we call 'Tone from the Top.' It is the message that goes right across the organization, soliciting personal involvement and commitment of business group heads to strike the right climate within the organization," Darling said.

"Ethics officers have oversight for all ethics-related issues. For example, if there is an ethics problem or complaint, [they] have the responsibility for investigating it and actually closing the issue once they feel it has been resolved," Darling said, adding that no business group in Prudential can close an issue without the ethics officer's official authorization.

Privacy protection has become a central part of an insurance company's operation, particularly as a result of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999. Ethics officers are key to ensuring that companies are protecting the privacy of their employees, agents and customers. "The big issue now is that the financial-services industry must be in compliance with the GLBA law on privacy," O'Byrne said. "While New York Life has had a formal privacy program in place for over 20 years, our biggest effort this year will be to update our code to enhance our compliance within this new law."

Ethics on Guard

In the past, several insurers have faced expensive lawsuits or government fines due to alleged misconduct or wrongdoing. Many companies have established ethics officer posts to safeguard against these potential allegations. If a company is faced with an allegation of unethical practices, it can result in substantial financial losses for the business. A recent example was a $1.7 billion settlement by Metropolitan Life Insurance Co. to resolve a class-action lawsuit involving "vanishing premiums," which tie premiums to interest rates.

Nationwide's ethics officers also conduct investigations and have an oversight of other entities assisting with the process, Flack said. "With a staff of three in a company of more than 30,000 employees, we have limited resources. Therefore, we need to take advantage of help by other offices to get the job done," he said. Such offices include internal audit, general counsel, internal security and human resources. After an investigation is made, results are reported to the ethics and business practices department. It is then the ethics officer's role to review the results and ensure that the investigation was conducted thoroughly. If further inquiry is warranted, ethics officers continue the investigation.

Prudential's ethics officer operates in a similar fashion. It is the officer's responsibility to investigate a situation, determine whether the issue is based on fact and, in some cases, refer the situation to a business unit where it can be resolved and acted upon, Darling said. "In some situations, they can refer [a situation] to human resources or bring expertise from other businesses if they feel other skill sets need to be added to the mix in order to investigate this effectively," Darling said. She added that Prudential's ethics officer has the authority to take an unresolved issue to the chairman or board of directors.

Having an ethics officer also may help a company that has been found guilty of a crime. "An effective compliance program can mitigate the penalties they would otherwise be subject to," said Nationwide's Flack. Nationwide created its office of ethics in 1993 to reinforce its traditional core values: honesty and integrity, he said.

"When you look at the benefits of having an ethics officer, you can suggest that it has a variety of positive impacts," Daigneault said. "One of them is internally on the impact of the company culture. [They] really amount to the creators of culture within the organization--a culture that pays attention to and takes serious ethics concerns, celebrates them and keeps them on people's mind."

Protecting Employees

Ethics officers play a key role in protecting employees and educating them about unethical practices and companies' codes of conduct. A large majority of U.S. corporations currently promote ethics in the workplace and support training programs, according to the 2000 National Business Ethics Survey conducted by the Ethics Research Center. The study is based on a telephone survey of 1,500 U.S. employees and their perceptions of workplace ethics. According to the survey, only one in eight employees feels pressure to compromise his or her company's ethical standards.

It is imperative that employees know they work for a company with a clearly established code of conduct and that they are aware of where to go if they have a complaint or if they feel that an unethical practice is occurring within the company, O'Byrne said. "There have been studies done that say employees are happier working for a company that they feel is an ethically aware environment. This translates into higher productivity," he said.

Resolving Problems In 2000, Prudential combined the efforts of the ethics office and created the "Roads to Resolution" program to address employee concerns, a portion of which are of an ethical nature. "Our belief is that the quicker you get things resolved, the better working relationship you have in the company," Darling said.

Other insurance companies are undertaking similar efforts. New York Life and its ethics officers are on the verge of launching an online system for its employees during the first quarter of 2001. The intranet system will allow employees to view the company's code of conduct online and direct them to where they can go to voice concerns and receive answers. New York Life currently provides an online quiz to test employee's understanding of the company's ethics and business-conduct policies.

"This is just one of the many ways the company's ethics officers are working to keep employees in touch with company policies and ethical standards," O'Byrne said.

Looking Ahead

The role of ethics officers is expanding.

"I think that if ethics officers are going to be successful, they have to dynamically expand the scope of their operations within the organization," the Ethics Resource Center's Daigneault said. "There is a progression taking place within the ethics-officer world from compliance to ethics, and now from ethics to integrity. By integrity, for example, we mean a large subset of issues incorporating rights, such as human, environmental, labor issues and privacy concerns. I believe if ethics officers are going to be altimately successful in helping to manage the culture of their organization, they have to expand the scope of their operations to all these integrity issues as well."

Darling agreed, indicating that Prudential has received much positive feedback from customers about how its ethics officer is enforcing and upholding the company's standards of trust.

"For a company like ours, our business is trust, and we need to uphold the highest ethical standards in doing so," she said. "The work of the ethics office in concert with our business leaders has been invaluable in building this kind of trust with our customers."
COPYRIGHT 2001 A.M. Best Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Author:Chordas, Lori
Publication:Best's Review
Article Type:Brief Article
Geographic Code:1USA
Date:Mar 1, 2001
Words:1805
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