Business & Money
By approaching Sarbanes-Oxley compliance as an opportunity rather than a burden, companies can reap strategic rewards and become stronger.
The stakes have risen in the compliance game. A series of incendiary scandals-followed by the Sarbanes-Oxley Act and its implementing regulations-have focused the scorching light of public scrutiny onto public companies in all industries, and the heat is particularly intense for investor-owned utilities.
Regulators and investor groups demand that utility companies demonstrate they are squeaky-clean, inside and out. From American Electric Power Co. to Maine Public Service, energy and utility companies across the nation are renewing their commitment to ethics and good governance.
That, as Martha Stewart might say, is a good thing.
But now that the smoke is beginning to clear from the American corporate conflagration, companies are moving out of firefighting mode and into long-term fire prevention.
"Now the challenge for companies is to ensure that the compliance programs they have established adhere to best practices," says Deborah Meshulam, a partner with the Piper Rudnick law firm in Washington, D.C., and formerly assistant chief litigation counsel with the SEC's enforcement division.
"Sarbanes-Oxley has added a wide range of new issues to the traditional compliance function," Meshulam says. Coping with these issues on a long-term basis requires companies not only to review and update their policies; it requires them to make substantive organizational and cultural accommodations, and to train personnel at virtually all levels on the new compliance mandates.
So even as the scrutiny subsides, companies must maintain their commitment to the goal of unimpeachable corporate ethics. Doing that cost-effectively and efficiently across the entire organization is the next big challenge in the governance game.
The updating of governance and financial reporting policies has required enormous time and attention during the past 18 months. Companies have enhanced the authority, skills, and resources of their internal audit and compliance functions, and they have instituted new ethics, governance, and accounting policies.
But the game isn't over yet. Sarbanes-Oxley compliance will continue devouring resources in the months and years to come.
"This is one of the larger risks we are facing," says Scott Smith, chief risk officer at AEP. "Some companies might think they have all the controls in place already, but that just means they haven't read all the regulations."
In fact, not all the regulations exist yet. As recently as Aug. 8, the SEC proposed new rules regarding disclosure in director-nomination procedures. Thus companies must continue tracking changes in the law and integrating them into their policies.
Such steps may not be enough by themselves, however. Regulators and investor groups alike are focusing attention on precisely how companies are implementing new standards. Moody's Investors Service, in developing its new corporate governance assessment methodology, cited as a red flag "an ethics policy that appears to lack coherence or clear methods for implementation, suggesting possible lack of commitment to ensuring ethical practices in the organization."
Reading between the lines, it becomes clear that companies are not expected just to comply with the letter of the law, but to integrate the spirit of the law into everything they do. "It's not enough to develop an ethics program or a set of written policies," says Samuel J. (Sandy) Winer, a partner with Foley & Lardner in Washington, D.C., and former staff attorney and special counsel with the SEC's enforcement division. "You have to make sure it becomes part of the company's culture. That requires training and having a staff of people responsible for making sure personnel are aligned with the changed culture."
These efforts are not just necessary evils, however. Approached correctly, Sarbanes-Oxley compliance can yield real business benefits.
For example, legal experts note that a diligent training and monitoring program can help a company defend itself in future legal challenges. And some companies see these compliance systems as tools for prevention, investigation, and prosecution of fraud cases. "The ability to see an employee's signature on a code of conduct and a training record can help our ability to prosecute discipline cases," says Brian Wenning, ethics and compliance director with TXU Business Services.
Furthermore, many companies are finding strategic benefits in the compliance process. "Sarbanes-Oxley is an opportunity to improve the business model," says Laura Brooks, chief risk officer at Public Service Enterprise Group in Newark, N.J. "Let's not make this a compliance exercise, but an opportunity to demonstrate that good internal controls can improve the transactional decision-making process and enhance the bottom line."
Integrating new governance standards into a large and diverse organization requires a significant commitment of talent and resources. Many companies, for example, have established special committees to implement the new standards.
At DTE Energy, this responsibility falls to the company's compliance office-which, while it existed before Sarbanes-Oxley, redoubled its efforts in the wake of governance scandals at Enron and other companies. Specifically, DTE began assessing its compliance programs more frequently, and it instituted processes for analyzing compliance risks and identifying areas needing further attention.
"The climate was changing so rapidly it forced us to think of new ways to enhance employee education and awareness," says Jeannie Zimbalatti, a compliance expert in DTE Energy's compliance office. "We needed a program that dealt with the complex topics of compliance and ethics issues, but that would also be both informative and entertaining to every employee across the board."
With 14,000 employees, the company also needed a program that could be delivered cost-effectively and conveniently to a large organization. These requirements led DTE to a six-month search for third-party vendors of ethics-training systems. The company finally settled on a Web-based program from Integrity Interactive Corp. of Waltham, Mass. In addition to satisfying the company's basic requirements, the system offered flexibility in terms of content.
"You always have logistic issues, but we found that with a Web-based program, it could be modified to keep up with changes in the law and could be tailored to address our internal culture," Zimbalatti says.
And more importantly, Web delivery makes training cost-effective in a way that face-to-face programs cannot. Indeed, training the workforce of a large company on ethics issues might have been virtually impossible without the Web.
"It would have been fair in the 1990s for companies to say, 'We have 30,000 employees and 40 percent turnover. There's no way to train all these people in our code of conduct and legal compliance,'" says Kirk Jordan, a vice president with Integrity Interactive. "The Internet has taken that excuse away. It is now physically possible to reach anyone, anywhere on the globe-and what's more, to prove that you are doing it."
A Matter of Trust
Recent events have taught a painful lesson on the value of a company's reputation. "The only way to build a solid and enduring reputation is to demonstrate over time that you do the right thing," says Dov Seidman, CEO of LRN. He points out that this requires companies to embrace not just the rules but the intent behind them.
"If you have a rules-based culture, you encourage gamesmanship," Seidman says. "But in the end, embracing the principles behind Sarbanes-Oxley is more important than taking a technocratic approach to the rules themselves."
As a result, leading companies make earning and maintaining the trust of stakeholders a primary goal of their ethics programs. They hold themselves to a higher standard than the minimum acceptable, and they approach new governance requirements not as simply another regulatory burden, but as an opportunity to improve their business processes.
In the long run, such companies will be better prepared to endure harsh public scrutiny, and they may well emerge as the industry's strongest and most successful players.
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