Weyerhaeuser Company and Waste Management Weyerhaeuser Nancy Thomas-Moore Director, Ethics and Business Conduct Waste Management Bill Prachar VP, Business Ethics and Compliance Linda Lipps Manager, Corporate Ethics Case studies in Corporate Responsibility

Before (and after) Sarbanes Or … how we got where we are and where we’re going

Historical Context The history of business excesses and the public opinion/political/legal response to them is probably as old as “business” itself. Response to excesses historically relates to: –Legal (civil and criminal sanctions) –Corporate Governance –Compliance standards –Cultural reform (ethics) Focus today on “modern” (post-1985) developments and trends

Methodology We’ll look at the drivers that are forcing business organizations to redesign approach to governance, ethics and compliance How do these apply to privately held businesses We’ll try to put the questions and responses into historical perspective We’ll speculate (together) on where we’re going

A time line of key developments 1980s - Defense industry procurement irregularities Packard Commission study and recommendations Birth of DII (Defense Industry Initiative on Business Ethics and Compliance) False Claims Act Amendments Organizational Sentencing Guidelines Medicare Fraud 1990s - Case law Enron, WorldCom, etc – Sarbanes-Oxley

Defense industry procurement irregularities Ill Wind investigations and other procurement scandals of mid 1980s highlighted problem $400 hammer (equal allocation), $2000 toilet seat, $14,000 coffee maker didn’t help public perception

Packard Commission study and recommendations In 1985 President Reagan established Blue Ribbon Commission on Defense Management under David Packard In addition to regulation, the report urged the industry to self-regulate by: –Developing and vigilantly enforcing codes of ethics –The response was the DII

Birth of DII (Defense Industry Initiative on Business Ethics and Compliance) Jack Welch called the major defense contractors and urged action 18 contractors met and formed DII Six basic principles: –Codes of Ethics –Ethics Training –Internal reporting of alleged misconduct (Hot Lines) –Internal controls and self-reporting (voluntary reporting) –Sharing industry best practices –Accountability to the public

1986 False Claims Act Amendments False Claims Act or “Lincoln Law” passed in 1863 to control Civil War profiteers swindling the Union Army “Qui tam” provisions allow private citizens to sue on behalf of the government –Assessed double damages and $2000 fine for each false claim –“Relator” entitled to 50% of Government’s recovery Act “weakened” in 1943 Act amended in 1986 (Grassley & Berman) –Relator gets 15-30% –Treble damages and $5000-$10,000 civil penalty for each false claim

Federal Sentencing Guidelines, a.k.a. Organizational Sentencing Guidelines – Background U.S.Sentencing Commission established by Sentencing Reform Act of 1984 –Purpose: Eliminate disparity in sentencing by limiting judicial discretion Guidelines developed first for individuals Guidelines for organizations became effective 11/1/1991 DII experience and testimony given great weight

Organizational Sentencing Guidelines – “Carrot and Stick” Guidelines apply to most Federal crimes committed by corporations Fine range determined by “point” scale Up to 95% reduction in fine possible if corporation: –Has “effective compliance program” –Self-reports –Cooperates with Government investigation –Accepts Responsibility

Organizational Sentencing Guidelines - 7 Basic Elements of an “Effective Compliance Program” Standards & Procedures. An organization must have established compliance standards and procedures “that are reasonably capable of reducing the prospect of criminal conduct.” High-Level Oversight. One or more senior corporate officials must have been assigned “overall responsibility to oversee compliance.” Care in Delegating Authority. Due care required to avoid delegating substantial discretionary authority to persons the organization knew, or should have known, “had a propensity to engage in illegal activities.” Education and Training. Must “communicate effectively” standards and procedures to all employees and agents through training programs and “practical” publications.

Organizational Sentencing Guidelines - 7 Basic Elements of an “Effective Compliance Program” Auditing, Monitoring & Reporting Systems. Must take reasonable steps to achieve compliance with standards by utilizing monitoring and auditing systems reasonably designed to detect criminal conduct and have in place and publicize an employee reporting system to report criminal conduct without fear of retribution. Consistent Enforcement. Standards must be consistently enforced through appropriate disciplinary mechanisms. Appropriate Response. After issues detected organization must take reasonable steps to respond appropriately and take such steps as necessary, including program modifications, to prevent similar offenses.

Organizational Sentencing Guidelines “Effective Compliance Program” – Other Factors Sophistication of program will depend on: –Size of Organization. The larger the organization, the more program formality is required. –Nature of Business. The likelihood that certain offenses may occur due to the nature of the organization’s business means that special care must be taken to prevent those types of offenses. –Prior history of organization. Recurrence of misconduct “casts doubt on whether it took all reasonable steps to prevent such misconduct.”

Organizational Sentencing Guidelines “Effective Compliance Program” Justice Department Charging Guidelines (Holder Memorandum) say there are two critical factors in determining effectiveness: –“…whether the program is adequately designed for maximum effectiveness in preventing and detecting wrongdoing.” –“…whether corporate management is enforcing the program or is tacitly encouraging or pressuring employees to engage in misconduct to achieve business objectives.”

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In re Caremark Delaware Chancery case Strong dictum regarding advisability of Boards adopting and overseeing implementation of Sentencing Guidelines compliant “effective compliance programs” Chancellor Allen wrote: "Any rational person attempting in good faith to meet an organizational governance responsibility would be bound to take into account this development [the adoption of the Organizational Sentencing guidelines] and the enhanced penalties and the opportunities for reduced sanctions that it offers." He continued: "The Guidelines offer powerful incentives for corporations today to have in place compliance programs to detect violations of law, to promptly report violations to appropriate public officials when discovered, and to take prompt, voluntary remedial efforts."

Other Compliance Program Drivers Case Law –Faragher v. City of Boca Raton and Burlington Industries, Inc. v. Ellerth. U.S. Supreme Court rules that in certain circumstances an effective compliance program can act as an affirmative defense to hostile environment sexual harassment claims. Policy Trends –EPA policy provides, in some circumstances, for reduced civil penalties and no criminal sanctions when corporation has effective environmental compliance program. Medicare Fraud –HHS adopts several model compliance plans following sentencing guidelines model.

Enron, WorldCom, etc. So what’s this all mean for all of us involved in law, regulation, compliance governance? –Congressional, SEC, Stock Exchange response –Challenges facing corporate lawyers and compliance officers –Clues of the rest of us.

Some areas of tension “Hot Lines” as a tool to uncover illegal, unethical, or policy violating acts. –Not a privileged communication –Must investigate all issues Voluntary disclosure Self examination privilege??? “To dig or not to dig?”, that is the question.

Waste Management A Case Study The Ethics Revolution in The American Workplace By Linda Lipps

WM History “Old” Waste –1970s Wall Street ‘darling’ Merger –03-98 the unthinkable happens Improper accounting tactics –SEC begins investigation “New” Waste Management –11-98

Problems At The Door Waste Management had lost the trust of its customers, employees and investors. The company’s information systems could not get accurate bills out to its customers. Customers were leaving to the competitors. Employee morale was sinking faster than the Titanic. The stock price was sinking along with it.

“Great companies are admired for their products, services, and integrity. We want to be a great company.” Maury Myers Company had excellent physical assets. Hard working people who were willing to listen. And about $1 billion in free cash flow.

What Was Necessary? A Clear Set of Core Values. Effective Leadership. Communication. -Honesty -Respect -Citizenship -Responsibility -Environmental Stewardship -Excellence

Program Framework Code of Conduct CEO Updates/ Town Hall Meetings Training Poster s Video Integrity Help Line

In Conclusion….