Ethical conduct: what financial executives do to lead. (Financial Leadership).

TWO IDEAL PORTRAITS OF ETHICAL BEHAVIOR EMERGED FROM A NEW REPORT BY THE FINANCIAL EXECUTIVES RESEARCH FOUNDATION: THE "ETHICALLY INTELLIGENT FINANCIAL EXECUTIVE" (EIFE) AND THE "ETHICAL INTELLIGENT FINANCE ORGANIZATION" (EIFO).

Today's so-called "crisis" of accountability or financial integrity has been met with a flurry of laws and regulations designed to restore public confidence in corporations. Likewise, many financial institutions and some corporations seem to be trying to outdo one another in announcing new policies demonstrating their commitment to integrity and ethical behavior.

Yet, a new Executive Report by the Financial Executives Research Foundation finds that the vast majority of corporations and financial executives express strong beliefs that ethical behavior and financial integrity remain the rule of the day. Rather than believing that investor confidence can be restored by external regulation, they see the importance of "staying the course" and "walking the walk" as both the ethical gatekeeper and conscience of their organizations.

In the study, Integrity-Based Financial Leadership and Ethical Behavior: A Professional Response to Meeting the Challenges and Responsibilities, financial executives from a wide range of companies openly share thoughts, insights and practices that relate to the "crisis" of financial integrity.

While the findings are vast, and at times controversial, two ideal portraits of ethical behavior emerged: the "Ethically Intelligent Financial Executive" (EIFE) and the "Ethically Intelligent Finance Organization" (EIFO).

The Ethically Intelligent Financial Executive

He or she is aware of the multiple pressures that may potentially impinge upon the maintenance of one's integrity, and is further aware of the ubiquitous presence of ethical dilemmas faced by leaders in daily business life, and takes the time to reflect upon these dilemmas.

George Boyadjis, EVP, CFO and Treasurer of American TeleCare Inc., speaks for many in the study when he observes, "So much of what we do is driven by the creation of value through increasing the speed of business--shortening time to market, accelerating growth rates, cutting cycle times, etc. But, if we as financial executives are truly focused on value creation for the enterprise, then we must also reflect on the ethics and transparency of transactions and relationships."

The EIFE is a valued business partner who actively assists the businesses in planning, development and implementation of projects and goals, and as the conscience of the organization, he or she at times must say "no." This executive also sets the tone at the top and leads by example.

A highly visible role model, the EIFE uses every opportunity to articulate and demonstrate high-integrity behavior to the finance organization and to the organization as a whole. This is the true meaning of integrity-based leadership.

Finally, the ETFE typically has received some training in the area of ethics. When playing a leadership role, he or she provides ample opportunities to others to experience ethical dilemmas through situational training opportunities, bringing financial people together with business associates from a wide spectrum of backgrounds.

Nick Cyprus, VP and Controller of AT&T Corp. notes, "In addition to standard controls, such as a code of conduct and good background checks, other controls could also be used. For example, financial people should be trained to identify and understand ethical/unethical behaviors and situations. I like to get all my controllers and their key leaders together to do just that. We break into teams, where each team gets a different business situation to deal with. They then have to come back to the broader group and discuss how they decided to resolve it.

"Basically, I give them the interesting situations I see on a day-to-day basis--not the headliners, but the stuff you really tend to confront all of the time. What's important is that the training gives them an opportunity, [so] that when they actually see that situation, they know what to do. You have to set the right tone, and ethics training helps in that regard."

The Ethically Intelligent Finance Organization

The authors suggest that there is an "ideal" finance organization for ethical conduct. They found it quite extraordinary how much agreement existed among financial executives when it came to the "operationalization" of ethical conduct through the structure and support mechanisms inherent in the structure of finance organizations.

The EIFO "walks the talk of integrity." Structurally, it strikes a balance between centralization and decentralization. On the one hand, concentrating too much authority in a few hands may encourage the abuse of power. On the other hand, a clear functional chain of command, especially with a strong finance organization at the top, can be an important source of support for those financial executives working closely with and/or reporting to operations.

Eli Lilly and Co.'s Executive Director, Finance and Chief Accounting Officer, Arnold Hanish, reiterated the importance of financial executives being accountable to, and having the support of, corporate finance: "Our operations management understand that their finance colleagues have a certain amount of latitude and some degree of judgment as it relates to interpreting accounting rules and financial matters, but ultimately must follow the rules and behave in an ethical manner."

Given the plethora of rules and regulations in the pharmaceutical industry, they can certainly relate to the policies and practices within finance, maintains Hanish. If there are any questions or grey areas, the finance member of the operations team generally contacts corporate for advice and direction.

The EIFO embraces corporate codes of ethics and mission statements--formal training on such documents are imperative. Most importantly, EIFOs incorporate such codes of conduct into their financial decision-making processes. Such rules of conduct are more than just compliance statements of behavior; they are action statements.

At Medtronic Inc., VP, Corporate Controller and Treasurer Gary L. Ellis says, "There are two reference points regarding ethics--the company mission statement and its code of conduct. When looking at any major transaction or acquisition, these two pillars become our guiding lights. If we are uncomfortable with the management or the culture of the target organization, relevant to our mission statement or code of conduct, then we won't do the deal, no matter how attractive it may be."

Moreover, the research indicates that in EIFOs, rewarding integrity and integrity-based leadership is critical. Tying performance appraisals to living a company's values and demonstrated integrity is one way of doing that.

Some finance organizations set their ethical tone at the bottom as well as the top, working with professionals (internal or external) who assist them in selecting and orienting high-integrity new hires. Ethical profiling is becoming a common and expected practice. Several executives said their organizations have hiring practices that attempt to select for qualities related to ethical behavior.

The financial executives seem to agree that there should be no difference between one's personal and business ethics. In today's atmosphere, it is no longer acceptable to rationalize bad behavior by deferring to the notion that "business is business." A business model paradigm shift--perhaps driven by growing ethical awareness and social responsibility--is occurring. The executives in this study welcome a vision of business in which integrity is not something to be checked at the corporate door, but is an integral part of life in and out of business, and a central aspect of all financial decision-making processes.

Medtronic's Ellis points out, "For the most part, being involved in the businesses is the right thing. I just don't see any negatives to a business partnering relationship. Where it might have gotten a little out of kilter is where the finance organization came up with the deals that saved the quarter. If you look at the companies that got in trouble, the 'deal-makers'--the ones that were really coming up with the "flavor of the month ideas"--were not assisting the businesses, but in almost all cases, were creating a completely different business. This is not business partnering."

Ellis asserts that the last thing financial executives should do is climb back into their financial silos. "We will be much more successful as a profession in bringing back corporate America by being good business partners, but doing so with integrity."

RELATED ARTICLE: PRESSURES ON ETHICAL CONDUCT

Why do good people do bad things? Pressures on financial professionals might tempt them to stray from ethical behavior. Cognizance of the pressures can be an important preventive measure.

* Emphasis on Short-Term Results

Executives stressed as a critical concern the importance of "making the numbers" in the short term. This can lead to a shortsighted approach to push the envelope on both the accounting and the business side.

* Sweat the Small Stuff 

Corporate misdeeds are often the culmination of a series of small steps. These are not the notorious crimes that make headlines, but rather the relatively mundane issues faced on a daily basis. The first step may seem immaterial and unimportant, but can set in motion a series of events leading to a major ethical breach.

* Economic Downturns

Some executives felt that the current ethical crisis is essentially a cyclical event--"a down market reveals what an up market conceals." Clearly, pressure to meet short-term results is exacerbated in a cyclical downturn.

* Accounting Rules

Accounting rules and the transactions that they reflect have become increasingly complex and less intuitive--making it easier to abuse the rules or commit outright fraud. To compensate, many are moving toward greater disclosure--which does not always mean better understanding; it can create more confusion for "typical" shareholders.

Fred Militello Jr. is a Senior Partner with FinQuest Partners LLC, a Wall Street-based financial consultancy practice, and adjunct professor of finance and international business at New York University's Leonard N. Stern School of Business, Dr. Michael Schwalbert is associated with Hudson Valley Psychology Associates PLC. The complete study can be purchased from the Financial Executives Research Foundation at: www.fei.org/rfbookstore, or 973.765.1033.