by Steve Priest, President of Ethical Leadership Group (a Global Compliance Company)

In his keynote address to the Ethics and Compliance Officer Association in September 2008, Lynn Turner constructed his own “Seven Steps” to an effective ethics and compliance program. Lynn is worth listening to because he’s not an ethics and compliance “insider,” nor is he an attorney. In these times of financial turmoil, many in Washington and Wall Street pay attention to what he has to say.

One would think his accounting expertise might lead to seven steps quite different from the hallowed US Sentencing Guidelines elements. Yet most of his seven steps are unsurprising—indeed quite traditional.

1. Leadership matters. Watch what people do, not what they say.
2. The Code of Conduct should be high quality, including compliance, enforcement, and accountability for those who observe wrongdoing to do something about it. It should also be certified annually.
3. Establish accountability by having real enforcement and sufficient punishment for wrongdoers.
4. Train everybody—including the Board of Directors and senior leadership.
5. Ensure the whistleblower program has sufficient independence.
6. Engage the Board of Directors in the program.
7. Make sure the program includes incentives and compensation in its work—it should help employees avoid temptation.

On their face, most of Lynn Turner’s seven steps are non-controversial. They echo the Guidelines elements. One, however, is interpreted in a way that departs from many in the ethics and compliance field. I’ll discuss this step—whistleblower program independence—in a blog later this week.

About Lynn Turner
He was the chief accountant at the SEC, serves on the Standards Advisory Group of the Public Companies Accounting Oversight Board (PCAOB), a member of the FASB Investor Technical Advisory Committee, and on the Treasury Committee on the Auditing Profession. He also serves on the board and audit committee of the Colorado Public Employees Retirement Association.

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Lynn Turner, former chief accountant at the SEC, told an audience of six hundred ethics professionals this week that Alan Greenspan didn’t think it mattered. Turner, speaking on Sep. 25, a day when all eyes were directed at Washington DC, where government leaders were scrambling to salvage a $700 billion bailout of financial institutions and the global economy, covered wide ground in his keynote speech to the Ethics and Compliance Officer Association in Orlando.

I’ll cover more about his presentation in an upcoming entry, but the talk of the hallways was Mr. Turner’s recollection of a meeting he attended when he was Chief Accountant for the SEC with then-Chairman of the SEC Arthur Levitt, then-Chairman of the Federal Reserve Alan Greenspan, and a number of other leaders from both institutions. Mr. Turner recounted how at the meeting he criticized inappropriate accounting practices by a number of banks. After Turner’s critique, he recalls Alan Greenspan saying “What’s the matter if the banks fudge their numbers a little bit?”

Given the magnitude of the current crisis in financial services we could hardly believe our ears. Could this really have happened? Mr. Turner seemed to have little affinity for Mr. Greenspan, calling him simply “Greenspan” while everybody else in his stories had a first name. Perhaps Greenspan made the comment ironically, and Turner failed to note or recount this important detail.

If Greenspan actually made this comment seriously, it is a stunning and important piece of the economic history unfolding daily. A tone like that reverberates throughout a culture for a long time. It is a perfect illustration of what not to do as the leader of an organization. Tone at the top is an ethics mantra for a reason. And the worst tone of all is the message that a little bit of fudging the numbers is OK. This is damning if you are the CEO of a small manufacturing firm, and even more so if you are the head of the Fed.

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The current financial crisis that has destabilized markets over the past weeks is at its root a crisis of trust. Originally thought of as a liquidity crunch growing out of the sub-prime mortgage debacle, the problem is not liquidity. The Federal Reserve and other central banks have flooded the system with liquidity, to little effect. Rather, even healthy financial institutions have recently begun hoarding cash, unwilling to trust counter-parties for fear of a sudden bankruptcy. Without this free flow of capital to credit-worthy businesses, companies are unable to fund day to day operations. This crisis of trust is threatening to paralyze the entire economic system.

Yet this trust deficit has been present in the system for a while. The sub-prime mortgage problem that ignited the current meltdown well over a year ago itself grew out of a crisis of trust. Consider the sequence of events: mortgage brokers assured sub-prime borrowers that their loans could be easily repaid, rating agencies gave these loans high credit ratings based on limited data, and banks accepted these ratings even though they were counter-intuitive on their face, as high ratings made it more profitable to sell these loans into the broader market. Each party, from the initial borrower to the final purchaser of what are now referred to as “toxic” loans, made the unfortunate mistake of trusting each other and the process.

The entire episode is an excellent example of the importance of trust in the functioning of a market. While a strong economy can withstand small violations of trust, over time the costs of mistrust overwhelm the system. Additionally, trust is precious and fragile, and once broken it is difficult to recover. As a result, our economy may take a while to recover from this current trust crisis. Yet as it does (which it surely will) businesses that can demonstrate real trustworthiness will have a real advantage in the new economy.

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