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LEGAL ISSUES

Do the Right Thing -- or Else

New federal ethics rules apply to all companies, regardless of size.
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Ahh, the benefits of being privately held. No securities regulators to fear. Fewer acts of legislation to comply with. Sure, owning your own company has its own set of headaches, but compared with life on Wall Street, being closely held sometimes seems like a relief. Well, here's a question for you: Have you heard of the Federal Sentencing Guidelines? If not, you might want to do some studying -- and fast.

The guidelines, created by the government in 1991, instruct federal judges on how to punish organizations guilty of crimes such as fraud, polluting, and cooking the books. In the past, the rules seldom concerned anyone besides lawyers at large, publicly traded firms. But beginning this month, all businesses -- public and private, large and small -- will be expected to, as the guidelines put it, "promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law."

What does that mean for your company? The first thing to understand is that the guidelines are less laws to follow than a blueprint to use to help reduce your exposure to prosecution. Rather than forcing companies to take specific actions, the guidelines encourage managers to use ethics and compliance programs to educate and train employees about how to avoid criminal conduct in the first place. Based on similar rules used to sentence individuals, judges are directed to show leniency toward offending companies if they can show they are basically good kids who slipped up -- reducing fines, probationary periods, and even jail time by as much as 95%. A sound ethics program could even help persuade a judge to "drop you off the radar altogether," says Heather Badami, a partner with the Washington, D.C., law firm Bryan Cave.

The Federal Sentencing Commission began revisiting the guidelines following the recent spate of corporate scandals, and this time decided to target small businesses as well as publicly held giants. Why? Despite the huge amount of publicity generated by scandals at places like Enron and Tyco, small, privately held companies account for the majority of the roughly 250 organizations that face prosecution in the federal courts each year, says Paula Desio, deputy general counsel for the commission. Of the 252 companies convicted in federal courts in 2002, for example, 141 of them had fewer than 200 employees -- and none of them had a suitable compliance program in place.

The good news is that the commission expects less of small firms than it does of large ones, says Stephen Paskoff, CEO of ELI, an Atlanta consulting firm and an official with the American Bar Association. What the commission expects is for CEOs to take the lead in promoting ethical values in their organizations (see "Ethics Made Easy"). "It's important to articulate in simple, nonlegalese messages how everyone has to behave," Paskoff says. "It really comes down to simply telling the truth." Especially before you have to place your hand on a Bible.

Ethics Made Easy

The new sentencing guidelines are couched in 624 pages of legalese. Allow us to translate. Here are five things you can do right now to change the culture at your company -- and satisfy the Feds.

  • Create a formal, written ethics policy.
  • Require managers and officers to monitor compliance.
  • Screen potential employees carefully before hiring.
  • Develop incentives to promote compliance.
  • Encourage employees to speak up when they encounter problems.
Last updated: Nov 1, 2004

DARREN DAHL

Darren Dahl is a contributing editor at Inc. magazine, which he has written for since 2004. He also works as a collaborative writer and editor and has partnered with several high-profile authors. Dahl lives in Asheville, North Carolina.




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