Is your company ethical, or merely compliant?

According to press accounts last week, the Securities and Exchange Commission has decided not to bring insider trading charges against former Berkshire Hathaway executive David Sokol. Last year that company’s CEO, Warren Buffett,  fired Sokol for allegedly violating its internal “insider trading rules by failing to disclose his purchase of Lubrizol shares, less than four weeks after starting talks with Citigroup bankers on acquiring all the shares in the chemicals company that Berkshire Hathaway did not already own.” The value of Sokol’s investment had risen from about $10 million at the time of purchase to about $13 million when Berkshire agreed to the acquisition several months later.  However, the SEC decided that it could not prove that the information – while clearly non-public – was “material,” which is an essential element of any insider trading case.  Nonetheless, according to one story, “Berkshire followers said … the SEC’s decision is unlikely to sway Mr. Buffett, who has long held his top executives to high ethical standards.”

Many companies say that they require that their employees not only abide by the law but also maintain high ethical standards.  But what does that actually mean in practice?

Perhaps the best way to see if ethics – as opposed to narrowly focused compliance – really matters at a company is to ask (as I do when I conduct assessments of  C&E programs) if the company has ever forgone a significant business advantage that would have been legal but not ethical to pursue/maintain. (This can include discrete business  transactions, campaigns, strategies, relations with other organizations or allowing the continued employment of a star performer who has engaged in ethically dubious conduct but has not broken the  law.)  Very often the answer to this inquiry is no.

A second test of whether a company truly promotes ethical, as well as compliance-based, conduct, is checking whether its risk assessment expressly includes an ethics dimension.  For more on what this means see this article from the CCI web site.

A third such test is to see where a company sets the bar for key areas of conduct in its policies – including insider trading (a topic which, because it is mostly conflict-of- interest based, is of particular interest to this blog).  Examples include limitations on short sales, transactions involving options and “churning.”  While not necessarily involving insider trading, each of these entails actions which, when engaged in by insiders, can hurt a company’s reputation or create incentives for the insider to engage in conduct that is not in the company’s interest. And the same is true for the conduct at issue in the Berkshire Hathaway case.

Note – I’m definitely not suggesting that these three tests are the only relevant measurements of ethicality by corporations. There are indeed many others.  But hopefully they will be of use to some organizations which, like Berkshire Hathaway, seek to hold their employees (and particularly their leaders) to a higher standard.

One Comment
  1. Jason Lunday 5 years ago

    Nice insights, Jeff! Very helpful guidance on discerning the “ethics” among all the compliance activities.

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