Managing Risks for Corporate Integrity 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 How to Survive an Ethical Misconduct Disaster BREWER " CHANDLER " FERRELL CAPITALIZING ON THE VALUE OF INTEGRITY: AN INTEGRATED MODEL TO STANDARDIZE THE MEASURE OF NON- FINANCIAL PERFORMANCE AS AN ASSESSMENT OF CORPORATE INTEGRITY LYNN BREWER 7 Redefining Integrity The corporate scandals that began in the early 2000s with Enron revealed business ethics as a key element of corporate responsibility. Investors were suddenly faced with the realization the underlying integrity of financial statements and their ability to make good investment decisions requires a better understanding of non-financial performance and its impact on financial performance. The burden now is placed upon corporations to find a meaningful way to measure non-financial performance as a means of communicating corporate integrity.
Despite the immense changes in regulation following the corporate scandals, a recent survey of executives and board directors found nearly three-quarters were under increased pressure to assess non-financial performance. Most, however, struggle to find a ... more. less.
way to quantifiably measure their non-financial performance. 1 Why?<br><br> Because no standardized measure of non-financial performance exists that provides for the increased transparency the regulatory changes were expected to provide and investors demand. To transcend regulation as a means of transparency, we must begin by redefining cintegrity d. Initially seen as synonymous with business ethics, the focus was on values, providing for, at best, a qualitative assessment, which cannot be standardized.<br><br> However, by shifting the focus from values-based to structural soundness, wholeness and incorruptibility of the corporation, we can meet the needs of both investors and board directors by providing a quantifiably measure of the corporation 9s ability to withstand market forces. 7 Lynn Brewer is a former Enron executive responsible for risk management in energy operations, the e- commerce initiatives for Enron 9s water subsidiary, and competitive intelligence for Enron broadband services. She currently serves as the Founding Chair of The Integrity Institute, Inc.<br><br> Ms. Brewer is the author of Confessions of an Enron Executive: A Whistleblower 9s Story (AuthorHouse, Inc. 2004).<br><br> The author would like to thank Deloitte for recognizing ctraditional financial measures fail on many fronts d to predict the future performance of an organization because cfinancial results are the end product of a host of non-financial factors. d Further gratitude is extended to the Founding Members of The Integrity Institute, Inc., namely Messod Daniel Beneish, Ph.D. (Professor, Kelley School of Business, Indiana University), Kim Cameron, Ph.D. (Professor, University of Michigan-Business School), Robert Chandler, PhD.<br><br> (Professor, Pepperdine University), Oren Harari, Ph.D. (Professor, Graduate School of Business, University of San Francisco), Larry Ponemon, Ph.D. (Chairman and Founder of The Ponemon Institute), Robert Quinn, Ph.D.<br><br> (Professor, University of Michigan-Business School), Fred Whittlesey, and all of the other contributors for recognizing the value of integrity. 1 Deloitte and EIU, In the Dark: What Boards and Executives Don't Know About the Health of Their Businesses, 3 , (Oct. 13, 2004) (unpublished whitepaper) available at http://www.deloitte.com/dtt/cda/doc/content/dtt_audit_InthedarkFINAL2_101304.pdf.<br><br> 2 Measuring Integrity : The regulatory focus on the Sarbanes-Oxley Act 2 ( cSOX d) has placed an undue burden on corporations in the area of compliance but does little to provide real shareholder value and certainly has not reassured investors as the markets remain cflat d three years after the passage of perhaps the most sweeping changes in corporate securities law since 1933. SOX focuses on the punitives facing a company that engages in questionable accounting but does not provide predictive insight into the cmarkers d that have proven to ultimately destroy a company 9s shareholder value. 3 Models such as Six Sigma 4 and the Balanced Scorecard 5 seek to understand and refine an organization to achieve better results.<br><br> However, these models, and others, fail to meet a cwholeness d test necessary for a more complete understanding of corporate integrity. Even the Triple Bottom Line 6 falls short. To quantifiably measure the integrity of an organization, the measures must be integrated to determine the correlative values of the key indicators.<br><br> The purpose of an integrated model that measures the wholeness, soundness and incorruptibility of an organization is two-fold: (1) To provide leaders and directors with a broad spectrum understanding of the organization in order to effectively enhance the bottom line without increasing risk; and (2) To provide a predictive ability to create long- term shareholder value for investors. Although residual benefits exist beyond these two objectives, the long-term opportunity exists to transcend regulation by providing an alternative 4assessment and certification of corporate integrity. Companies could capitalize on the value of integrity and realize a financial creturn on integrity d.<br><br> The goal of a broad acceptance of a standardized model that assesses corporate integrity, which can used as the basis for certification, is that we could end the need for regulation, and more specifically SOX, as a means of transparency. However, to achieve this goal, two things must occur: 1) A movement away from the current means of myopic measures of governance, risk and compliance to a standardized model that not only assesses key non-financial performance indicators but integrates those measures to understand the correlation between the measures; and 2) Avoidance of the inherent 2 15 U.S.C. § 7201 (2003).<br><br> [hereinafter the Act]. 3 See id . 4 Six Sigma c[l]iterally, refers to the reduction of errors to six standard deviations from the mean value of a process output or task opportunities, i.e.<br><br> about 1 error in 300,000 opportunities. In modern practice, this terminology has been applied to a quality improvement methodology for industry. d Balanced Scorecard Institute, Definitions of Terms , at http://www.balancedscorecard.org/basics/definitions.html (last visited July 1, 2005). 5 A Balanced Scorecard is ca management system .<br><br> . . that enables organizations to clarify their vision and strategy and translate them into action.<br><br> It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise. d Balanced Scorecard Institute, What is the Balanced Scorecard? , at http://www.balancedscorecard.org/basics/bsc1.html (last visited July 1, 2005).<br><br> 6 cThe Triple Bottom Line (TBL) focuses corporations not just on the economic value they add, but also on the environmental and social value they add 3 and destroy. At its narrowest, the term 8triple bottom line 9 is used as a framework for measuring and reporting corporate performance against economic, social and environmental parameters. d Sustainability, What is the Triple Bottom Line?, 1 (unpublished whitepaper) at http://www.sustainability.com/downloads_public/news/TBL.pdf (last visited July 1, 2005). 3 problems facing the accounting of financial performance by multiple commercial firms interpreting generally accepted accounting principles, the assessment and certification of corporate integrity would need to be administered by a single public policy institute to maintain the integrity and provide the greatest value proposition for companies and their investors.<br><br> Similar to the Underwriters Laboratories Model. 7 , assessment of a company 9s integrity would be independently and objectively certified, similar to the Good Housekeeping Seal of Approval. 8 This approach provides the organization with the ability to communicate its adherence to a standard of integrity and also provides investors with the ability to trust the quality of the communication.<br><br> It is not the intent of this article to suggest that companies stop using the various models currently used in an effort to understand their business. Rather, employing a standardized method to objectively assess and certify the structural integrity of a company will help leaders and board directors better understand the impact non-financial performance is having on their financial performance. It also reassures investors that integrity exists beyond the quality of financial reporting.<br><br> Integria " 9 3 The Integrated Model to Standardize the Measure of Integrity Similar to mapping the DNA of an organization, the unique Integria" Model, (the cModel d) integrates ten components, or drivers, to determine the cmarkers d that can weaken the overall structural soundness of the organization. The components measured include: (1) communication; (2) compensation; (3) compliance and ethics; (4) corporate citizenship (environmental and social responsibility); (5) culture; (6) earnings; (7) governance; (8) leadership; (9) risk; and (10) stakeholder perceptions. While institutional investors already use many of these drivers, the Model, for the first time, integrates them to establish a standard that can predict the sustainability and success of the organization.<br><br> This measurement to an established standard is then used as the basis of certification of integrity by The Integrity Institute. The measurement of each specific driver is based upon widely accepted and acclaimed models that have been validated and contributed to The Integrity Institute by its Founding Members, each a renowned expert in their respective field. The independent models are used to assess the integrity of each intangible driver and the results are then measured and weighted relative to the other nine components.<br><br> To protect the integrity of the Model, the specific weighting of each integrated component is proprietary and therefore will not be discussed in detail in this article. Using business analytic technology 7 The Underwriters Laboratories Inc. test consumer products for safety.<br><br> The company has a broad range of exacting standards for its testing. See Underwriters Laboratories, at http://www.ul.com (last visited July 1, 2005). 8 The Good Housekeeping Seal states that if a product bearing the Seal proves to be defective within two years of purchase, Good Housekeeping will replace the product or refund the purchase price.<br><br> See What 9s Behind the Good Housekeeping Seal at http://magazines.ivillage.com/goodhousekeeping/consumer/institute/articles/0,,284512_596441,00.html (last visited Nov. 1, 2005). 9 The Integria mark has been filed as a ccertification d mark with the United States Patent and Trademark Office.<br><br> 4 and a weighting similar to that of Fair Isaac 10 credit scoring, the Model dynamically predicts the likelihood of future events that can increase or decrease shareholder value, raise or lower the cost of capital, impact employee retention, and determine the impact the organization 9s non-financial performance is likely to have on the risk profile established by the company. OVERVIEW OF METHODOLOGIES Standardizing the measure of non-financial performance begins and ends with the quality, transparency, and integrity of communications between organizations and their stakeholders. To that end, we begin with the overview of the individual components of the Model with the measure of communications integrity.<br><br> 11 (1) Communication Integrity The Communication Integrity Assessment Model 12 draws upon a number of organizational communication theories and empirical research findings, as well as business ethics models in the assessment of manifested communication that can be predictive indicators of ethics and integrity. The assessment model and related research method (instruments, procedures, and data analysis process) examines samples of both public (external) and private (internal) communication. There are four communication dimensions measured: 1) communicated information; 2) communicated messages; 3) communicated meta-messages; and 4) communication processes.<br><br> In addition, the issue of measuring cethical communication d itself is an additional evaluation assessment of the model and method. Communicated information includes the presence/absence of specific words, phrases, data, content, or facts/figures in the various communication artifacts sampled. In addition to the presence or absence of specific information, the question of how frequently such words appear, the timing of when, where, and how such information appears in the communication content are analyzed.<br><br> Communicated messages are a broader and more thematic communication content. Included in this analysis are the explicit messages about cnorms d, rules, expectations, climate, and modeling of how to act ethically with integrity and implicit messages (reading between the lines) about these same issues. It is significant to determine the consistency / inconsistency between the explicit and implicit messages.<br><br> The overt 10 See Fair Isaac, Understanding Your Credit Score , 1 (July, 2002) (unpublished whitepaper) available at http://www.fairisaac.com/NR/rdonlyres/6F127C6D-E5D2-4EB3-B0CC- A0BD3FE00D94/0/UnderstandCreditScoreBklt.pdf ( cThe most widely used credit scores are FICO scores. Lenders use FICO scores to make billions of credit decisions every year. Fair Isaac develops FICO scores based solely on information in consumer credit reports maintained at the credit reporting agencies. d).<br><br> 11 Note: The models outlined below are in alphabetical order. They are not in order of importance or by strength of the weighting in the Integria" Model. 12 The Communication Integrity Assessment Model is recognized as a trademark of The Integrity Institute, Inc.<br><br> and has been integrated into the Integria" Model. The Integria mark has been filed as a ccertification d mark with the United States Patent and Trademark Office. The Communication Integrity Assessment Model was developed by Robert Chandler, Ph.D.<br><br> (Chair of the Communication Division of Seaver College at Pepperdine University). Professor Chandler is a Founding Member of The Integrity Institute and has contributed his model to The Integrity Institute for integration into the Integria" Model. 5 communication to foster ethics and integrity among employees are measured and evaluated.<br><br> Communicated meta - messages are messages that are not explicitly (high contest) articulated yet are clear and discernable by audiences. These implicit messages may be about cnorms d, rules, expectations, climate, and modeling of how to act ethically with integrity. The method seeks to recognize what is being communicated cbetween or underneath d the lines of the explicit messages.<br><br> Communication processes include both formal and informal procedures, mechanisms, reporting rules, policies, feedback channels, participation norms, and communication networks that operate within the organization. Various conclusions about underlying ethical characteristics can be drawn from a snapshot of the communication process that typify (or are absent) in an organization. One primary method to measure communication integrity focuses on the content of the annual letter to shareholders written voluntarily by, or at least signed by, the CEO or Chairman of the company.<br><br> Analyzing of the cognitive content of the annual letter measures to what extent forward-thinking statements are realized, as well as the leadership 9s willingness to be held accountable for any failures to meet the objectives identified in the letter from the previous year. While the financial information contained within the annual report reflects the cresults d of the previous year, the letter to shareholders provides cinsight d into the future, and yet a unique understanding of the present mindset of the leadership. According to the studies by Laura Rittenhouse, who has studied CEO letters for the past ten years, companies where the CEO candidly communicates in the annual letter to shareholders consistently outperform those who rank among the bottom.<br><br> 13 For the year ending 2003, top-ranked companies in Rittenhouse 9s survey increased the value of their share price over a two-year period by 21.5%, while bottom-ranked companies saw only a 7.3% increase. 14 Top-ranked firms also beat the S&P 500 Index Fund over the previous two years. 15 On its face this may seem like an obscure measure of a company 9s integrity.<br><br> As a simple example of the importance of this document, we need only review Enron 9s 2000 letter to shareholders included in its annual report and signed by CEO Jeffrey K. Skilling. It stated Enron had hit ca record $1.3 billion in net income d.<br><br> 16 Yet the audited financials contained in the same annual report were clear 4Enron had reached only a fraction of that amount 17 . There were no footnotes or further discussion as to the basis for the discrepancy. Despite this sobering reality, every reference by the media or analysts from that point forward stated that Enron was a $1.3 billion company 4no questions asked.<br><br> 13 See Selena Maranjian , CEOs Fail Candor Test , T HE M OTLEY F OOL , July 21, 2004 available at http://www.fool.com/news/mft/2004/mft04072106.htm (citing the studies performed by Laura J. Rittenhouse); Stephen Taub , Link Found Between Candor, Share Prices: Most CEOs at Large Public Companies Fail to Report Net Income Forthrightly, Survey Finds , CFO M AGAZINE , at http://www.cfo.com/article.cfm/3014591 (Jun 15. 2004).<br><br> 14 See id . 15 See id . 16 Jeffery K.<br><br> Skilling & Kenneth Lay, Enron Annual Report 2000, Letter to Shareholders , available at www.enron.com/corp/investors/ annuals/2000/shareholder.html (last visited June 10, 2005). 17 The amount of Enron 9s net income was only $978 million according to the financials audited by Arthur Andersen for the year ended 2000. www.enron.com/corp/investors/ annuals/2000/shareholder.html 6 By the mid-1970s, the cAnnual Report d had become cpossibly the most important corporate marketing device, d 18 as a result of statutory requirements for publicly traded companies.<br><br> According to Mike Jones, in addition to marketing efforts, accounting narratives are cunlikely to be impartial and . . .<br><br> likely to be used by management to give a more favorable impression of corporate performance than is warranted. d 19 Analysis of the letter to shareholders specifically reveals that cwhat is omitted from an annual report is as significant as what is included in the narrative. d 20 The Jenkins Report identified 56 detailed items for disclosure outside the financial statements and related notes. 21 Among those items was the need for more information with a forward-looking perspective. 22 Beattie and Pratt also note, cThe historical, backward-looking perspective of the traditional accounting model becomes a less useful predictor of the future as the pace of change in business increases.<br><br> Moreover, financial performance measures have been shown to be lagging indicators of future performance compared to key non-financial indicators. d 23 No single shareholder letter is more widely read than Warren Buffett 9s, Chairman of Berkshire Hathaway. Mr. Buffett pointed out at the SEC roundtable held in New York, a month after the implosion of Enron, cthe CEO [should] regard himself as the Chief Disclosure Officer .<br><br> . . d and should write his own shareholder letter. 24 Buffett postulates 18 Patricia and John Stanton, Researching Corporate Annual Reports: An Analysis of Perspectives Used , 4 in C OLLECTED P APERS OF A PIRA A DLEAIDE 2001: T HE T HIRD A SIA P ACIFIC I NTERDISCIPLINARY R ESEARCH IN A CCOUNTING C ONFERENCE (Prof.<br><br> Lee D. Parker ed. 2001) available at http://www.commerce.adelaide.edu.au/apira/papers/Stanton51.pdf (last visited June 10, 2005) (quoting Sam McKinstry, Designing the Annual Reports of Burton PLC from 1930 to 1994 , 21.1 A CCT ., O RG .<br><br> & S OC 9 Y 89, 109 (1996)). 19 Id . at 5, in C OLLECTED P APERS OF A PIRA A DLEAIDE 2001: T HE T HIRD A SIA P ACIFIC I NTERDISCIPLINARY R ESEARCH IN A CCOUNTING C ONFERENCE (Prof.<br><br> Lee D. Parker ed. 2001) available at http://www.commerce.adelaide.edu.au/apira/papers/Stanton51.pdf (last visited June 10, 2005) (quoting Mike Jones, Accounting Narratives: An Emerging Trend ; Management Accounting Management Accounting, Apr., pp.<br><br> 41-42 (1996). 20 Id . at 15, in C OLLECTED P APERS OF A PIRA A DLEAIDE 2001: T HE T HIRD A SIA P ACIFIC I NTERDISCIPLINARY R ESEARCH IN A CCOUNTING C ONFERENCE (Prof.<br><br> Lee D. Parker ed. 2001) available at http://www.commerce.adelaide.edu.au/apira/papers/Stanton51.pdf (last visited June 10, 2005) (citing Daphne Jameson, Telling the Investment Story: A Narrative Analysis of Shareholder Reports , J.<br><br> OF B US . C OMM ., Vol.37 No.1, Jan. 2000, at 7; Carol A.<br><br> Adams & and George Harte, The Changing Portrayal of the Employment of Women in British Banks 9 and Retail Companies 9 Corporate Annual Reports , A CCT ., O RGS . & S OC 9 Y , Vol.23 No.8, 1998 at 781; Nola Buhr, Environmental Performance, Legislation and Annual Report Disclosure: The Case of Acid Rain and Falconbridge , A CCT ., A UDITING & A CCOUNTABILITY J. Vol.11 No.2,1998, at 163;Chatham (1978)).<br><br> 21 Vivien Beattie & Ken Pratt, Disclosure Items in a Comprehensive Model of Business Reporting: An Empirical Evaluation, 2 (June 2002) (unpublished white paper) at http://www.stir.ac.uk/Departments/Management/Accountancy/stfpages/beattie/Disclosureitems.pdf (citing AICPA, Improving Business Reporting 3 A Customer Focus: Meeting the Information Needs of Investors and Creditors , Comprehensive Report of the Special Committee on Financial Reporting (The Jenkins Report), American Institute of Certified Public Accountants, New York, NY, at http://www.aicpa.org/members/div/acctstd/ibr/index.htm (last visited June 12, 2005)). 22 Id . at 2.<br><br> 23 Id . at 3. 24 See Forbes.com, Faces of the Week: March 4 3 8, 2002 , Mar.<br><br> 9, 2002, at http://www.forbes.com/2002/03/08/0309faceweek.html (last visited June 12, 2005); IR Magazine, SEC Seeks Improved Disclosure: Suggestions Offered at the New York Roundtable Discussion , Mar. 4, 2002, at http://www.ironthenet.com/newsarticle.asp?current=1&articleID=1682 (last visited June 12, 2005). 7 that most letters are probably prepared by investor relations or public relations professionals, but R.D.<br><br> Hines points out that the chairman 9s statement (letter) is the most widely read section of the annual report. 25 In fact, the rest of the annual report is too complicated for the average investor to understand; in the case of Enron, it was too confusing even for institutional investors. Given the importance of this document in ascertaining the cognition and recognition of the CEO, key value drivers are identified through various studies.<br><br> Key words are used to measure the level of disclosure and then the extent to which emphasis is placed on such things as capital stewardship, strategy, vision, innovation, leadership, compliance, culture, environmental and social issues, corporate governance, and other areas of importance to investors such as executive compensation packages. Through this process and the examination of cforward-looking d statements, the assessment identifies the level of disclosure and seeks to predict whether a decrease in disclosure relates to the company 9s effort to hide losses, as loss-making firms tend to decrease disclosure in the year that the loss is reported. 26 The predictive analysis begins with identification of key words that are often associated with cforward-looking d statements.<br><br> Then, topics which are generally used for forecasting earnings, such as: earnings per share (EPS), breakeven, budget, contribution, earnings, loss, margin, profitability, and cash flow are considered. The analysis then includes data mining of statements previously made to determine whether the cpredictions d became reality. If, over time, cpredictions d do not meet reality then it may indicate the leadership is out of touch with reality, as we saw in the case of Enron.<br><br> (2) Compensation Integrity The issue of executive compensation is a particularly hot topic and would seem that the amount of executive compensation paid would be an obvious starting point for assessment of compensation integrity. Of course, the headlines seem to complicate the matter by focusing on stories of Sandy Weill, Chairman of Citigroup, who received $151 million in 2000, or Jack Welch, former Chairman of GE, who received $125 million for overseeing GE 9s success. 27 Yet little attention is paid to the fact that Warren Buffett, as Chairman of Berkshire Hathaway, in 1993, had an annual salary of $100,000, plus benefits for a total compensation package of $248,000, 28 (far less than the $5 million annual bonuses paid to mid-level executives at Enron).<br><br> Compensation, and more specifically executive compensation, is a complicated matter in a free market society. Executives who build the long-term value of a company for investors should be recognized and rewarded. But rewarding an executive (or any employee) with a package based upon false reality or performance that can be 25 Beattie & Pratt, supra note 19, at 5 (citing, R.D.<br><br> Hines The Usefulness of Annual Reports: The Anomaly Between the Efficient Markets Hypothesis and Shareholder Surveys , A CCT . & B US . R ES .<br><br> , Autumn 1982, at 296). 26 Khaled Hussainey, Thomas Schleicher & Martin Walker, The Information Content of the Annual Report Narratives of Loss-Making Firms: Preliminary Evidence, 1 (Aug. 9, 2004) (working draft of unpublished whitepaper) (quoted with permission from authors, copy on file with author).<br><br> 27 J ONATHAN L OWE & P AM C OHEN K ALAFUT , Cap Gemini Ernst & Young, US LLC, I NVISIBLE A DVANTAGE : H OW I NTANGIBLES ARE D RIVING B USINESS P ERFORMANCE 62 (Perseus Publishing 2002). 28 J ANET L OWE , W ARREN B UFFET S PEAKS 3 (John Wiley & Sons, Inc. 1997).<br><br> 8 manipulated can have a negative impact on the company 9s overall integrity. For instance, leaders who fail to recognize the disparity between their own compensation package and that of those whom they seek to lead, or promoting employees, just because they seem to provide short term gains for the company, despite the fact they may have engaged in behavior that violates the code of conduct, can devastate an organization 9s cultural integrity. Or, worse, if the compensation packages are tied to stock performance which calls into question the earnings integrity of the company, then predicatively, shareholder value can be destroyed virtually overnight.<br><br> As large institutional investors seek to enforce their rights as shareholders, the issue becomes even more complicated as negative value is placed upon these companies who are seen as paying excessive compensation. Companies that partake in the practice of excessive compensation over the interests of the shareholder will be penalized because appropriate executive compensation is considered a key component of good oversight by the board. Counterbalancing this effort by outsiders to cregulate d compensation based upon various and non-standard assessments is just one benefit of an independent and objective assessment of corporate integrity.<br><br> Rather than assess the issue myopically, however; The Integrity Institute 9s analysis seeks to measure the impact the compensation practices have on the overall integrity of the organization. While the issue at hand for the institutional shareholders is poor board governance, which could have been one of the factors that contributed to awarding excessive compensation in the case of Enron and the New York Stock Exchange (NYSE) 9s Richard Grasso, the integrity of the leadership played just as much of a role. The executives at both Enron and the NYSE created compensation packages that were so complicated not even the board fully understood the extent to which the compensation was excessive 4 leaving the members of the board itself personally exposed for failure to govern.<br><br> A board does have a fiduciary responsibility to uphold the integrity of its oversight; but senior executives can go to great lengths to keep facts hidden from the board, leaving directors in the dark. Unfortunately, the directors 9 lack of knowledge does not remove the liability facing them as courts have suggested that it isn 9t what board directors know that may hurt them but what they do not know. For this reason, the independent objective assessment of compensation integrity of the organization and its leadership becomes as important for the risk management of board directors as it does for the organization itself and its investors.<br><br> Just one example of outside efforts to regulate compensation comes as Moody 9s Investors Service found that one out of every four companies it reviewed had either excessive compensation or compensation that was not aligned with long-term growth and the bondholder 9s interest. 29 The largest influence in bringing this issue to light are the two largest institutional investors, CalPERS 30 and TIAA-CREF, 31 who have both created policies for fair and just compensation of executives. However, neither fund would argue that an effort to cstandardize d compensation is their intent but rather to ensure their own 29 Moody 9s Investors Service, Findings on Corporate Governance in the United States and Canada: August 2003 3 September 2004 (Oct.<br><br> 5, 2004) (on file with author) [ hereinafter Findings on Corporate Governance ]. 30 California Public Employees Retirement System (CalPERS). 31 Teachers Indemnity and Annuity Association and College Retirement Equities Fund (TIAA-CREF).<br><br> 9 stakeholders are protected which requires integrity in their own fiduciary responsibilities as capital stewards. With pension funds, which account for roughly 40 percent of all institutional money 32 , increasing their investments in under regulated hedge funds, thereby diverting funds at record numbers (up from $5 billion in 1995 to as much a $300 billion by 2008 33 ), companies would do well to heed these warnings. Access to institutional funds is going to get tighter, making it more imperative for companies to find a way to differentiate themselves from their competitors in attracting what now appears to be a reduction in targeted investment dollars.<br><br> Engaging in compensation practices that lack integrity is bound to draw attention towards a company alright but not in a positive way. However, with no means of counterbalancing the appearance that a company lacks integrity, the investors are likely to continue to dilute their interest in the markets which is cause for concern for our global economy as investment in our capital markets begin to shrink. Short of getting involved in hedge funds (as Enron did), assessment and certification of integrity may be the answer for many companies.<br><br> Of course as long as stock options are given to illiquid companies in which hedge funds are investing in the hopes of an IPO, listed companies will continue to heavily use options as a form of compensation to attract new talent. Efforts undertaken by executives to receive excessive compensation when contrasted with the rate of return to investors, or attempting to chide d the true value of their stock options by assigning artificially low values to expense options using the Black-Scholes model, 34 speaks to the wholeness and soundness of the organization 9s practices. Properly expensing stock options increases costs and reduces earnings and thus understating the value of options and the extent to which executives will go to hide their compensation package 4whether from the board or investors 4addresses the incorruptibility of an organization.<br><br> The mandatory adoption of FAS123R 3 option expensing 3 in 2005-2006 will begin to shed more light on this. Enron 9s own CEO, Jeff Skilling, brought the issue to light when it came to expensing stock options to create an illusion for investors. c[T]he most egregious [method of receiving excessive compensation] or the one that is used by every corporation in the world is executive stock options.<br><br> . . .<br><br> [E]ssentially what you do is you issue stock options to reduce compensation expense, and therefore increase your profitability. d 35 According to the Economist , stock options accounted for 58% of the pay of U.S. CEOs in 2001. That year, the average CEO earned $10.83 million.<br><br> Something to consider is that every day the stock price of a company that grants options goes up $1.00, the executives who are granted the options (often numbering in the millions), receive enormous benefit 4thereby creating a potential conflict of interest in maintaining a level of integrity. Having personally witnessed the widespread acceptance of fraud at Enron, the granting of options played a significant role in the demise of the cultural integrity as many, myself included, chose to clook the other way d for the benefit of those options. 32 cPension Plans Pouring Billions Into Hedge Funds d; Riva D.<br><br> Atlas, The New York Times, Sunday, November 27, 2005 33 Id. 34 Fisher Black and Myron Scholes developed the Black and Scholes Option Pricing Model in 1973. The model is widely accepted today as the standard method for expensing options.<br><br> See Bradley University, The Black and Scholes Model , at http://bradley.bradley.edu/~arr/bsm/pg04.html (last visited June 12, 2005). 35 U.S. S.<br><br> Comm. on Commerce, Sci. and Transp.<br><br> Holds Hearing on the Enron Collapse , 107th Cong. (2002) (Testimony Jeffrey K. Skilling) available at 2002 WL 274631.<br><br> 10 The SEC 9s recent investigation of Mercury Interactive, where executives clearly granted stock options to themselves and other employees when the stock was at its near terms lows 3 thus transferring millions of dollars of value from shareholders to employees 3 is not notable so much for the amounts of pay delivered but for the blatant violation of every facet of the company 9s stated compensation philosophy and strategy (per its Compensation Committee Report) and for violation of accounting and financial reporting rules and regulations. As this article is submitted for publication, it appears that more than a dozen companies are being investigated for the same, and billions of dollars of value were misappropriated. As Warren Buffett points out, maintaining integrity in expensing options is important.<br><br> cWhen a company gives something of value to its employees in return for their services, it is clearly a compensation expense. And if expenses don 9t belong in the earnings statement, where in the world do they belong? d 36 To demonstrate the financial impact of Buffett and Skilling 9s comments, we can look at just a few examples. Had options been expensed cJDS Uniphase 9s net loss in fiscal 2002 would increase [by] $564 million.<br><br> . . .<br><br> Brocade Communications System 9s 2001 profit of $3 million would have turned into a $592 million loss. [And] Dell 9s 2001 earnings would have been reduced [by] 59%; Intel 9s 79%; [and] Cisco 9s 171%. d 37 The correlation of compensation integrity and earnings integrity addresses this issue of restatements by these companies after stock options have already been exercised. Stock rises as earnings increase and untold numbers of options are granted and exercised before the rest of the world has time to react.<br><br> For instance, JDS Uniphase announced a restatement of its 3 rd Quarter 2001 results, causing its stock to drop to as low as $7.90 3 94% lower than its high of $146.32. The question is how many millions in stock options were granted at a strike price of $15.00, exercised at the $146.32 before the restatement and unsuspecting investors were left holding the bag at $7.90? On the other hand, companies like Brocade restated its earnings when it was revealed the company recorded stock option charges for employees too soon between May 1999 and July 2000.<br><br> Rather than recording the compensation upon the hire date of employees, the company recorded the compensation when the workers accepted the job offer. The net result caused an increase in Brocade 9s stock price. The Compensation Integrity Assessment Model 38 used by The Integrity Institute recognizes the notion of compensation being cexcessive d is not based on an absolute number or cmultiple d, but on the methods by which the compensation is determined; the relationship between compensation delivered and value created; and the periods over which the compensation is determined and delivered.<br><br> The focus of the model used for assessment of compensation integrity is not a moral judgment as to the amount of the compensation but whether the integrity of the compensation practices can ultimately impact the overall integrity of the organization. 36 Warren Buffett, Who Really Cooks the Books? , N.Y.<br><br> T IMES , Jul. 24, 2002, at A19. 37 Fulcrum Financial Inquiry, This Corporate Accounting Fraud Is Sanctioned , at http://www.fulcruminquiry.com/article21.htm (last revised September 2004).<br><br> 38 The Compensation Integrity Assessment Model is recognized as a trademark of The Integrity Institute, Inc. and has been integrated into the Integria" Model. The Integria mark has been filed as a ccertification d mark with the United States Patent and Trademark Office.<br><br> The Compensation Integrity Assessment Model was developed by compensation expert Fred Whittlesey who is a Founding Member of The Integrity Institute and has contributed his model to The Integrity Institute for integration into the Integria" Model. 11 The key consideration is whether a company can be managed in a sound and sustainable manner when it delivers compensation to individuals that to many appears to be excessive. Unfortunately it is not that simple.<br><br> Some of the highest earning executives have created tremendous long-term value for stakeholders; while other lesser paid executives have been convicted of egregious behavior. However for other companies we must ask two important questions: If the compensation of executives is not excessive, why hide it? And if the company desires to hide their compensation, what else will they hide?<br><br> Beyond excessive compensation, we look for other tactics used to motivate employees to take certain actions that can jeopardize the integrity of an organization. For example, paying bonuses to accounts payable personnel for holding payments to vendors; or paying compensation at any level of the organization based upon future outcomes that may be manipulated, such as selling goods before the end of the quarter with a side agreement that allows the goods to be returned at the beginning of the next quarter. These tactics that boost income or compensation signal that a company is weak and while may provide for short term returns will not provide for long term sustainability.<br><br> Finally, there are a number of compensation plan design details that until recently have received less attention, partly because of minimal disclosure requirements. Interestingly, it is these features that have created some of the most egregious compensation practices making headlines. Change-in-control provisions 3 the provisions for cgolden parachutes d are responsible for creating some recent furor in executive pay.<br><br> Among the provisions: cash payments of 3 years 9 worth of base salary, plus 3 years 9 of bonus, plus the full acceleration of all vesting schedules on stock based awards, and the list goes on. Perhaps the most questionable, is the ctax gross-up d 3 an additional payment of cash to cover taxes due on the compensation payments. Of course, this too is taxable compensation so a tax gross-up payment must be large enough that after it is taxed there is still sufficient money to cover the tax on the other forms of compensation.<br><br> Tax gross-up agreements are in place for 72% of CEOs in the top 50 NYSE companies (as measured by market capitalization) and 29% of the top NASDAQ firms. 39 The perverse incentive here is that a CEO may manage a company poorly, resulting in a decline in share value affecting all shareholders and creating a situation where the firm is a takeover target. The CEO then receives several years 9 worth of compensation, tax-free, as a reward for the poor job he or she has done.<br><br> Regardless of the past performance of the company, this also raises the question of whether such substantial financial opportunities create and incentive to sell the company regardless of the long- term impact of such an action. One element of the assessment of compensation integrity, in fact, is the analysis of the potential rewards for cfailure d compared to the potential rewards for long-term success. To the extent these rewards are even equal but several years 9 pay can be received for a few weeks or months of sales effort, we believe the compensation system has been structured to the detriment of the stakeholders.<br><br> These chidden d forms of compensation, along with non-qualified deferred compensation, executive retirement agreements, severance arrangements, and others are the source of the nine-figure compensation payments that are increasingly common. These instances, unfortunately, are commingled with cases of executives who have created substantial long-term value and deserve substantial rewards for doing so. It is this complexity that requires a detailed and thoughtful model of compensation integrity to 39 http://www.fwcook.com/cicreport.pdf 12 identify 3 before the pay is given for the wrong reason 3 those companies with unsustainable compensation policies that will ultimately be to the long-term, or even short-term, detriment of stakeholders.<br><br> The assessment model 9s main purpose is to identify the philosophy, strategy, and processes used by the organization in compensation practices. The assessment focuses on four aspects of pay: (1) Pay Governance : the policies, processes, and outcomes for determining and delivering pay; (2) Financial efficiency: the extent to which compensation program design optimizes financial outcomes for all stakeholders; (3) Compliance and disclosure: the degree to which the Company adheres to the spirit and the letter of compensation disclosures and regulatory requirements; and (4) Execution: how compensation programs are actually operated relative to stated philosophies and strategies and plan objectives. Through the analysis, The Integrity Institute determines the premise for the assignment of compensation and examines its impact on a company 9s organizational and cultural integrity, as well as the impact earnings integrity is having on the compensation integrity.<br><br> Then opportunities for and barriers to improvement emerge in the areas of base salaries, annual incentives, long-term incentives, supplemental benefits, prerequisites, severance, deferred compensation or crabbi trusts, d 40 change-in-control or cgolden parachutes. d The resulting data is then measured against: (1) nontransparent compensation and incomplete disclosures; (2) peer comparisons; (3) accounting measures used in bonus plans, restricted stock awards, option pricing and re-pricing; (4) supplemental executive retirement plans; (5) the disclosed or undisclosed perks and benefits; and (6) any golden- parachutes. Other issues considered include: (1) to what extent the executive compensation is increasing in comparison to the value the stock has decreased; (2) to what extent executives have received payments for short-term achievement of accounting-based goals (e.g., earnings per share) in absence of real economic performance and shareholder value creation; (3) whether equity compensation is being delivered in a manner consistent with the stated objectives of the plan; and (4) the aggregate amount of compensation delivered relative to financial results for the organization. While none of the compensation factors on their face may indicate that an organization does not have integrity in its compensation practices, it does provide a good understanding of the executive team 9s alignment with stakeholder interests and their capital stewardship practices.<br><br> And because the measures outlined are then measured against the other cintangible d factors that drive non-financial performance, we are able to predicatively determine to what extent compensation practices of the organization jeopardize the integrity of the organization and its financial performance, rather than leave the matter to speculation and the influence of non-standard measures. 40 A rabbi trust is an irrevocable trust used to fund deferred compensation benefits. It is often used as a vehicle for deferring taxable income.<br><br> A rabbi trust must be both cunfunded d and benefit a select group of employees. The term was created in the 1980s as a result of a synagogue receiving a watershed IRS Letter Ruling that confirmed tax deferral for a rabbi who was the beneficiary of a trust established to pay him retirement benefits. See Donald O.<br><br> Jansen, Fullbright & Jaworski, L.L.P., Nonqualified Deferred Compensation: Securing the Unsecured Promise to Pay (2003) (unpublished paper) at http://www.fulbright.com/images/publications/NonQualifiedDefered.pdf (last visited June 13, 2005); s ee also Priv. Ltr. Rul.<br><br> 9344038, available at 1993 WL 451166. 13 (3) Compliance and Ethical Integrity As noted in a recent benchmarking study by the Open Compliance and Ethics Group ( www.OCEG.org ): Organizations that are unable to demonstrate that they comply with minimum legal requirements on a variety of fronts are being regularly dropped from investment and insurance portfolios. Those organizations with identified governance weaknesses, or ambiguity with respect to compliance, pay a penalty in terms of increased insurance rates or reduced coverage.<br><br> Investors, especially institutional investors and pension plans, are demanding more disclosure and more influence in directing good corporate governance. Ratings agencies and analysts are convinced that there is a cognizable difference in business performance between organizations that exhibit good corporate governance and those that exhibit poor corporate governance. Stock pricing is beginning to reflect this belief.<br><br> On a positive note, those organizations that demonstrate excellence in ethics and governance are benefiting by receiving better insurance coverage and rates, higher bond ratings, and improved stock performance. 41 In 2001 companies in the United States alone spent $843 billion annually to comply with regulatory requirements. In 2004, the amount rose to a staggering $1.1 trillion annually.<br><br> Yet over the same time period, whistle-blowing reports to the Securities and Exchange Commission rose from 6,400 per month in 2001 to 40,000 per month in 2004. Enforcement actions went from 484 in 2001 to 639 in 2004 and fines went from $500 million to $3 billion 42 . The question is 4if companies spending so much to be in compliance with the law, why are the reports of fraud up?<br><br> There can be no doubt there are a number of contributing factors, the least of which is a heightened awareness of the devastation that can be caused by a company 9s lack of integrity; and yet the government 9s response has always been to simply pile yet another piece of regulation on top of another with no real benefit. As best said by John A. Thain, CEO of the New York Stock Exchange states, cThere is no question that, broadly speaking, Sarbanes-Oxley was necessary d 43 ; however, the cost of implementing the new requirements has led some to question how effective or necessary the specific provisions of the law truly are.<br><br> According to the Financial Executives International (FEI), in a survey of 217 companies with average revenue above $5 billion, the cost of compliance with SOX Section 404 alone was an average of $4.36 million. The survey also indicated actual costs associated with compliance to be approximately 39% higher than companies expected to 41 OCEG Research Report WP2004.01 3Corporate Governance: Firm and Market Performance Review available to registered users of www.oceg.org 42 OCEG 2005 Benchmarking Study sponsored by AON, pg. 4 available at www.OCEG.org.<br><br> 43 Here It Comes: The Sarbanes-Oxley Backlash; New York Times, April 17, 2005 (Jonathan D. Glater) 14 spend. 44 And yet, according William H.<br><br> Donaldson, the SEC 9s chairman at the time, at the end of March 2005, of the 2,500 companies that filed internal controls reports with the Securities and Exchange Commission, under SOX 404, about 8 percent, or 200, found material weaknesses 45 . While 200 represents a small fraction of the 11,000 US listed companies and may not be statistically significant; 40,000 whistle-blowing reports to the SEC every month is. Even if 75% of the reports are disgruntled employees or frivolous reports, unlikely although, it still means the SEC is receiving more reports of misdeeds every month than there are publicly traded companies.<br><br> This presents the likelihood that more material weaknesses exist than are being reported. The argument will always be made in the interpretation of cmateriality d used by the company. Although as Aldous Huxley once pointed out cFacts do not cease to exist because they are ignored. d To add insult to injury, cto prosecute or not to prosecute d is no longer the question asked by the Justice Department.<br><br> It has now moved from this two-prong approach to add a third option: Deferred Prosecution Agreements. Rather than undergo lengthy efforts to prosecute a company, which even if successful may be overturned on appeal, as we found with the conviction of Arthur Andersen, prosecution is being deferred. Deferred Prosecution means the company can forego prosecution for a stated period of time; however, they must admit guilt and pay the fines placed upon them by the government.<br><br> The result is increased civil liabilities as class action lawyers use the guilty pleas as the basis for derivative suits. The other element of the Deferred Prosecution Agreement requires the company to demonstrate a marked improvement in its practices which lead to the corruption; however, prior to the development of the Integria Model, no standardized measure existed that would provide a company with an opportunity to bargain for baseline assessment and ultimate certification of corporate integrity over admitting any guilt. The Integrity Institute now offers this alternative to companies who are the subject of prosecution.<br><br> The Integrity Institute uses the framework developed by the Open Compliance and Ethics Group (OCEG) 46 as the basis for our Compliance and Ethics Integrity Assessment Model 47 . The OCEG Framework enhances organizational value by providing universal guidelines for integrated compliance and ethics programs. By incorporating effective governance, compliance, and risk management into all their business practices, organizations can begin to measure the effectiveness and performance of their programs against an objective, external benchmark.<br><br> 48 The OCEG guidelines encompass the cfull 44 Id. 45 Id. 46 The Open Compliance and Ethics Group (OCEG) cwas formed by a multi-industry, multi-disciplinary coalition that saw the need to integrate the principles of effective governance, compliance, risk management and integrity into the practice of everyday business. d OCEG, About OCEG , at http://oceg.org/about.asp (last visited July 1, 2005).<br><br> The Integrity Institute, Inc. is a member of OCEG and the author sat on the Steering Committee that developed the OCEG Framework and is a member of the Leadership Council of OCEG. 47 The Compliance and Ethics Integrity Assessment Model is recognized as a trademark of The Integrity Institute, Inc.<br><br> and has been integrated into the Integria" Model. The Integria mark has been filed as a ccertification d mark with the United States Patent and Trademark Office. The Integrity Institute does not claim any proprietary rights to the content of OCEG but only the process of assessment and certification of compliance and ethics and the relative weighting thereto as integrated into the Integria" Model.<br><br> 48 The OCEG Framework is comprised of two broad components: The Foundation and Domains. The Foundation embodies key elements common to all types of compliance and ethics programs. The Domains 15 lifecycle of planning, implementing, managing, evaluating, and improving integrated compliance and ethics programs. d 49 The OCEG Framework allows us to assess compliance with salient laws, rules, and regulations, as well as mandated responses that an organization must take to reduce legal and regulatory risks.<br><br> By using the Framework, organizations are provided with tangible actions they should take to address both short and long-term legal risks, as well as related integral, ethical, and reputational risks often associated with the cspirit d of the law. The OCEG Framework incorporates the Federal Sentencing Guidelines 50 (FSG), 2004 FSG Proposed Amendments, 51 the cThompson memo, d 52 COSO Enterprise Risk Management, 53 Six Sigma, 54 Australian Standard AS3806-1998, 55 Sarbanes-Oxley, 56 SEC rules, 57 PCAOB rules, 58 PLI Compliance Counselor, 59 ISO 9000- and 14000-series quality frameworks, 60 Malcolm Baldrige Award criteria, 61 HCCA recommendations, 62 and many other governing rules and regulations. provide guidelines that are specific to a particular topic, industry, function, geographic location, or size/structure of an organization.<br><br> See OCEG, Foundation Guidelines cRed Book d , B8-9, Apr. 2005, at http://oceg.org/anonDoc.asp?doc=OCEG.FND.AppDraft.RedBook.pdf (last visited July 1, 2005). 49 OCEG, About OCEG , at http://oceg.org/about.asp (last visited July 1, 2005).<br><br> 50 See U.S. S ENTENCING G UIDELINES M ANUAL , available at http://www.ussc.gov (last visited Aug. 3, 2005).<br><br> 51 See United States Sentencing Commission, Amendments to the Sentencing Guidelines , May 10, 2004, available at http://www.ussc.gov/2004guid/RFMay04.pdf. 52 Memorandum from Larry D. Thompson, Deputy Attorney General to Heads of Department Components, United States Attorneys, Principles of Federal Prosecution of Business Organizations (Jan.<br><br> 20, 2003) at http://www.usdoj.gov/dag/cftf/business_organizations.pdf. (last visited August 3, 2005). 53 The Committee of Sponsoring Organizations of the Treadway Commission.<br><br> cThe underlying premise of enterprise risk management is that every entity exists to provide value for its stakeholders. . .<br><br> . Enterprise risk management helps ensure effective reporting and compliance with laws and regulations, and helps avoid damage to the entity 9s reputation and associated consequences. In sum, enterprise risk management helps an entity get to where it wants to go and avoid pitfalls and surprises along the way. d COSO, Enterprise Risk Management 3 Integrated Framework: Executive Summary , 1, Sept.<br><br> 2004, at http://www.coso.org/Publications/ERM/COSO_ERM_ExecutiveSummary.pdf. 54 See supra , text accompanying note 4. 55 The Australian Standard for Compliance ccovers the structural, operational and maintenance elements to be included in any program.<br><br> . . .<br><br> It describes a comprehensive compliance management system, using elements common to systems of management and quality. d Gayle Hill, presentation delivered at The 9th International Anti-Corruption Conference, Workshop on Corporate Governance and Business Ethics: How can compliance be promoted and monitored? ( available at http://www.transparency.org/iacc/9th_iacc/papers/day2/ws3/d2ws3_ghill.html#ref1) (last visited July 1, 2005). 56 Sarbanes-Oxley Act of 2002, 15 U.S.C.<br><br> § 7201 (2003). 57 Securities and Exchange Commission. The SEC rules may be found in the Code of Federal Regulations.<br><br> 58 Public Company Accounting Oversight Board. cThe PCAOB is a private-sector, non-profit corporation, created by the Sarbanes-Oxley Act of 2002, to oversee the auditors of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports. d PCAOB, Our Mission , at http://www.pcaobus.org/ (last visited July 1, 2005). cPCAOB rules include auditing and related professional practice standards, Forms, and the Board's Bylaws and Ethics Code. d PCAOB, Rules , at http://www.pcaobus.org/Rules_of_the_Board/index.asp (last visited July 1, 2005).<br><br> See also PCAOB, Bylaws and Rules of the Public Company Accounting Oversight Board , Feb. 15, 2005, available at http://www.pcaobus.org/Rules_of_the_Board/Documents/Rules_of_the_Board/all.pdf. 59 See Practicing Law Institute, PLI Newsletters, The Compliance Counselor, available at http://www.pli.edu/public/newsletters/default.asp?ptid=000000000000000 (last visited Aug.<br><br> 3, 2005). 60 International Organization for Standardization. 16 An assessment of the integrity of an organization 9s compliance and ethics program using the OCEG Framework focuses on 25 high level areas that should be addressed in order to meet the test of integrity.<br><br> Using the Guidelines created by OCEG, The Integrity Institute can assess the integrity of the culture, the alignment of the strategy with the organization 9s compliance and ethics program, the ability to respond to the potential lapses in compliance with the organization 9s established program, and finally, the company 9s ongoing evaluation of its own program. The assessment of these four areas (governance, risk, compliance and culture) using the OCEG Guidelines allows The Integrity Institute to efficiently understand the soundness, wholeness, and incorruptibility of the compliance and ethics programs of any organization. (4) Corporate Citizenship Integrity (Environmental and Social Responsibility) Being a good company is noble, but the purpose of measuring the integrity of the environmental policies and social responsibility practices of an organization is far broader than corporate honor.<br><br> The focus of The Integrity Institute 9s corporate citizenship integrity assessment 63 measures the structure 4not the morality 4of corporate citizenship and identifies the changing landscape of environmental and social responsibility pressure being placed on companies to do the right thing. Companies that see the cmoral d importance to good corporate citizenship long ago adopted environmental and corporate social responsibility policies because it was the cright thing to do. d Often these companies have done so quietly. However, a growing number of companies realize that there is financial value tied to being (or at least being seen as) a cgood company. d These companies are more likely to be a bit more boisterous in their approach 4publishing, like Enron, glossy Corporate Social Responsibility ISO 9000 and ISO 14000 standards are implemented by some 634 000 organizations in 152 countries.<br><br> ISO 9000 has become an international reference for quality management requirements in business-to-business dealings, and ISO 14000 is well on the way to achieving as much, if not more, in enabling organizations to meet their environmental challenges. The ISO 9000 family is primarily concerned with "quality management". .<br><br> . . The ISO 14000 family is primarily concerned with "environmental management." ISO, ISO 9000 and ISO 14000 - in brief , at http://www.iso.org/iso/en/iso9000- 14000/understand/inbrief.html (last visited July 1, 2005).<br><br> 61 The Malcolm Baldrige Award was established by Congress on August 20, 1987 to honor former Secretary of Commerce Malcolm Baldrige. See 15 U.S.C. § 3711a.<br><br> 62 Health Care Compliance Association. cHCCA exists to champion ethical practice and compliance standards and to provide the necessary resources for ethics and compliance professionals and others who share these principles. d HCCA, About HCCA , at http://www.hcca- info.org/Content/NavigationMenu/About_HCCA/Mission_Statement_and_Bylaws/Mission_Statement_and _Bylaws.htm (last visited July 1, 2005). 63 The Corporate Citizenship Integrity Assessment Model is recognized as a trademark of The Integrity Institute, Inc.<br><br> and has been integrated into the Integria" Model. The Integria mark has been filed as a ccertification d mark with the United States Patent and Trademark Office. The Corporate Citizenship Integrity Assessment Model is based upon the development of the model of Vasin, Heyn & Company and has been authorized by the firm for use by The Integrity Institute, Inc.<br><br> for integration into The Integria Model. 17 Reports. Jeff Immelt, CEO of General Electric, notes, cIf this wasn 9t good for business, we probably wouldn 9t do it. d 64 The question is: when is it good for business and when is it not?<br><br> When asked why GE would spend $20 million of its shareholders 9 money on health care in Ghana, a country where it does almost no business, Immelt points out that his vision for GE is to become known as a cgood company, d not just in the U.S. but around the world. Immelt recognizes something many leaders fail to recognize, cGood leaders give back. d Beyond giving back, which senior executives are unlikely to accept as an integrity measure, Immelt speaks to the changing landscape of today 9s business environment: The world 9s changed.<br><br> Businesses today aren 9t admired. Size is not respected. There 9s a bigger gulf today between haves and have-nots than ever before.<br><br> It 9s up to us to use our platform to be a good citizen. Because not only is it a nice thing to do, it 9s a business imperative. 65 The purpose of measuring corporate citizenship integrity of organizations is to predict the extent to which the organization 9s corporate citizenship policies and practices contribute to or destroy the value of integrity for the organization, including the measure of how the integrity of the company 9s reputation is tied to its effort to be a cgood d corporate citizen.<br><br> Commitment to good corporate citizenship demonstrates just how much pressure is influencing business. GE 9s business operations in Iran is a good example. Immelt notes, cWhile American firms are barred by law from doing business in Iran, [GE 9s] foreign- owned subsidiaries are permitted to do so. d 66 However, given the political pressure and the US policies on doing business in counties that sponsor terrorism, the legal loopholes appear to have closed in on GE.<br><br> A 2003 shareholder proposal from the pension funds of New York City police officers and firefighters, which had investments i