ERC Resource Center’s White Paper is in Italics followed by IBCM rejoinder.
ERC: 1. The title “Too Big to Regulate?” refers not to company size but to a broader question: whether the U.S. government’s regulatory and enforcement mechanisms can keep pace with the lightning fast pace of change and the often complex and vast challenges that change creates. And, in addressing that question, we also consider whether there are ways that the private sector can help lawmakers, regulators, and prosecutors fulfill their oversight and enforcement responsibilities.
ERC 2. At the July meeting, ERC Fellows heard from senior officials of the US Department of Justice, the Securities and Exchange Commission and the U.S. Sentencing Commission. All three speakers upheld that the government’s responsibility is to deter misconduct and crime, to enforce the law, and to uphold the integrity of the American marketplace. But they acknowledged a key role for business, too:
IBCM: Can anything be bigger than the Earth to Regulate? Earth is a substance with Quality and Action. Quality represents Responsibility and the Action the Accountability. Study of nature provides the clue to every substance in Tangible domain. Not one single substance ever moves without a collision course from Intangible. Otherwise it remains inert. The change that takes place during the two processes – Quality and then Action – is identical, between one substance and the other. Since they follow a set pattern changes are relative to the creation of substance and then again of its action. Creation is the most important aspect of a substance in question. In the chaotic world of business there is an urgency to market the concept rather than a product before it reaches the stage of a substance. IBCM recognizes the change modification from conceptual stage to creation stage of substance and then to Action process for task accomplishment. In each stage it captures the status that is identical to every other substance anywhere in the world. “Lightning fast pace of change” is recognized by IBCM and in fact “change” remains its only study of Governance. Viewing “change” when there should have been status of Inactivity is measured.
Government’s Regulatory and Enforcement mechanisms need to create a substance with Quality and Action defined. The three wings of the Government vis-à-vis the Private Sector belong to a single group – Fiscal Responsibility. IBCM recognizes Ethical Responsibility as the exclusive domain of the People. Person seeking a vote to the electorate speaks the truth: “You are the Master and I am the servant”, that does not take away the dictum because of the mechanisms adopted to appoint Justices or Regulatory bodies or any government functionary. Collectively they own only one Responsibility – Fiscal.
If this is understood then there will be no chaotic drama of escapism between the Government, Regulatory Authorities and the Corporate.
ERC 3. “For us to be successful, we need you to be successful. We would rather prevent crime than show up after the train wreck,” U.S. Deputy Assistant Attorney General Greg Andres declared. Lorin Reisner, Deputy Director of the SEC’s Enforcement Division, similarly observed that business can support deterrence efforts with strong compliance programs that not only deter illegal behavior, but also discourage employees from straying into the “gray area” of borderline conduct. Kathleen Grilli, Deputy General Counsel at the U.S. Sentencing Commission, stressed the importance of good corporate culture in which leadership “walks the walk.”
IBCM: The three criteria set by IBCM for a functional Governance are: 1. Real-time Monitoring, 2. Cost Consequence and 3. People Participation.
Quote from the book on Governance:”The expression “Those charged with Governance” is akin to “those who are charged with breathing”. Tangible item is inert and it is the intangible that converts the mass into energy. Governance is a dynamic force. In ‘running’ if one takes a photo at the time the athlete is getting ready to run there is no telling that the running has taken place. If the athlete abandons running and so reported later, it means ‘running’ has not taken place. Similarly reporting to those who are entrusted with Governance after the events have taken place that such and such lacunae are found means Governance has not taken place ab initio. Auditors who go for audit are to ensure that Governance takes place but the current reporting system is like a pussycat coming back after threatening the little mouse under the chair without performing the duty of looking at the subject. What happens in such cases of auditing, in reality, is reporting of the activity called ‘fraud or misfeasance’ is construed as reporting of the activity called ‘Governance’.”
Terrorism shows by itself with 9/11 scenario. But not corruption. The cost consequence of a corrupt society is visible but uncared for. More than a billion people go hungry everyday on this earth. Opposite value of eating is not hunger but fasting. Opposite value of hunger is not eating but morality. Study of opposite values provides the basis for Ethics. Gray area – is the forbidden fruit and straying into it can be seen only by Governance. Governance standards are non-existing. Governance at the moment is a blind man with no legs to support. IBCM provides the opportunity to Budget for and Govern Cost Consequence. The essence of Governance is the control of Cost Consequence.
Good Corporate Culture as well Government Culture, for there is no difference between the two as to its Fiscal Responsibility, is to have a functional Governance. Real time monitoring is a must as well the study of Cost Consequence. IBCM teaches how real-time monitoring is worked out, how cost consequence can be arrived at and why people participation is an absolute must, to “walk the walk”.
The White Paper refers to Governance only once and that too suffixed to Corporate. Government Governance is more important than Corporate. Governance is very essential to preventive measures that IBCM has taken Chapter II Preventive Measures of UNCAC – UN Convention Against Corruption, as the main case-study.
The ERC Fellows had questions of their own:
ERC: 4. Do officials recognize and give enough credit to sincere efforts by companies to foster ethical conduct among employees?
IBCM: IBCM proposes IESB – International Ethical Standards Board. It shall satisfy this question. ‘Officials’ themselves are needed to be brought under the purview of IESB. Both have specific areas of Accountability resulting in study of Cost Consequence. It has to be reminded again and again, there is only one single Responsibility Area where Accountability is called for – that is, Fiscal Responsibility that includes the three wings of Government, the Corporate as well other process areas such as Agriculture, Defense, Environment etc. Resource Areas have only one single owner – Ethical Responsibility entrusted to the care of the people who are subject to the Accountability factors for exercising their ownership.
ERC: 5. Could communication, and thus understanding, be improved between regulators and the regulated in a way that would add nuance to stereotypes on both sides?
IBCM: Governance standards need to be put through. Governance goes through a process of 5 layers, one during creative process and two during Action process. Communication is one of the layers under both the processes. Therefore between Regulators and the regulated what is needed is a statement of Responsibility for the regulator by creating a substance of Quality so that the Action process of Accountability is strictly adhered to and followed. It is not just one layer but a detailed Quality statement of Responsibility of 5 layers. There is no difference of Regulator/Regulated framework than the Government/Governed with Quality such as US Constitution in place. For every substance created.
ERC 6. Do judges make effective use of Federal Sentencing Guidelines for Organizations and properly credit companies that have installed effective ethics programs and enable ethics officers to access top executives and the board?
IBCM: Remember the three wings of the government as well the corporate form part of a single group – Fiscal Responsibility. To enable ethics officers to access top executives and the board – IBCM proposes – “Code of conduct for public officials is made feasible, with an operational qualified workforce of half-a- million under the aegis of proposed International Ethical Standards Board, to have an impact on the anti-corruption drive worldwide, a challenge all Member States should endorse”. “Operational Force – Code of Conduct for public officials, with an emphasis on mentoring as the active ingredient in the action process of the substance with so vast its power and compass”.
Do not make laws one for the Corporate and none for the Government officials. Always remember – there is only one single group.
In this paper, the Ethics Resource Center (ERC) draws some conclusions and makes recommendations of its own:
ERC: 7. No amount of regulation or enforcement resources will eliminate all wrongdoing, but there is little doubt that government and business share an interest in ethical conduct that gives investors confidence in the market’s inherent integrity.
IBCM: Inactivity Based Cost Management – is a study of Cost Consequence, by its theme Activity has a cost incidence whereas Inactivity has a cost consequence. Chapter 14 IBCM – UNCAC: Article 8 – Codes of Conduct for Public Officials is an elaborate assessment of UNCAC that shall cover all Public Officials – Government as well Corporate. Chapter II of UNCAC is an exercise on Preventive Measures. IBCM provides a detailed analysis of the platform that shall take into consideration the preventive measures at the forefront covering Promote Ethics, Codes of Conduct, Report System and Disciplinary Action. Investors’ confidence in the market depends upon the People’s confidence in the country. First establish the confidence measures for the country then market shall flourish.
It is not the amount of regulation or enforcement resources but the measure of Governance that shall provide an answer to the doubts raised. Imagine there is no method available to measure finance without a P&L or Balance Sheet prepared, then what would have been the comment for expenditure incurred by Corporate. To eliminate wrongdoing there must be a method followed. IBCM provides the method.
ERC 8. Despite natural tension between businesses and the government enforcement officers who prosecute corporate misconduct, partnership between government and private sector compliance officials can help build ethical cultures in the private sector and reduce errant behavior.
IBCM elaborates the scenario beginning 1977 when Lockheed scandals rocked US with the introduction of FCPA, yet followed by Nick Leeson bringing down an institution of over 300 years reputation Baring Bros to dust in 1995. OECD had attempted to control the menace of corruption and yet in 2007 Siemens involvement continues to rock the boat. What is needed is the measurement yardsticks of Governance that would help the private sector as well the government sector, data comparable for both. Compliance is a two-way process between the Government and the Private sector. GAO issued by United States Government Accountability Office, by the Comptroller General of the United States, Government Auditing Standards January 2007 Revision, needs further revision on Governance based on IBCM.
Ethical cultures cannot be built without a robust methodology of measuring Governance.
ERC 9. Ongoing dialogue between these sectors can provide government enforcement officers with a better understanding of how strong ethics programs can promote positive behavior in the private sector and discourage misconduct.
IBCM: Again it is worth repeating – Government as well Private Sector belong to a single group – Fiscal Responsibility. Both need strong ethics programs. Establishing IESB – International Ethical Standards Board is a necessity. Without a common standard the likelihood of ‘gray area’ becoming larger could bring Governance inoperative, as it is today. IESB shall certify the Code of Conduct of both – the regulator as well the regulated.
ERC 10. Better communication by government enforcers can help the private sector build compliance programs that will earn credit and respect from federal agencies and judges. For example, DOJ and the SEC could broaden training for prosecutors about ethics programs and ethical culture and their impact on corporate governance by arranging for participation of private sector ethics and compliance officers.
IBCM provides a methodology that can measure Governance, Corporate or otherwise. Do not differentiate DOJ or Government Officials or Corporate. All belong to a single group Fiscal Responsibility. Each has defined responsibility and accountability calibrated. By study of IBCM it is possible for training and follow-up action. Fiscal Responsibility group will be assessed on five areas: 1. Operational Efficiency, 2. Accounting Quality, 3. Financial Risks, 4. Management Quality and 5. Corporate [Government] Governance.
In order to have a clear understanding the book notes: Quote: The five resource areas [Responsibility is assigned to five resource areas of Governance: 1. People, 2. Technology, 3. Managerial Force, 4. Operational Force and 5. Finance.] need to set goals in order to accomplish the tasks entrusted to each substance. A goal when set will specifically indicate the responsibility borne by each of the five resource areas, even if the participation of one area is nil. Meaning the two groups Ethical and Fiscal responsibility, is a substance with quality and action, yoked together for accomplishment of a task. If participation of one of the five resource areas is non-existent, then that goal is not worth a goal to be set, in the first instance. Unquote
The book gives significant importance to Ethical Responsibility by yoking together the resource areas at every step of the operational efficiency. Ethical Responsibility is the unseen force, agreed upon in advance by Article 13 of UNCAC, so the commitment by the Corporate or Government to discharge the Social or Ethical Responsibility is clearly articulated and reported per Article 10 of UNCAC. Disaster like British petroleum or Inside Job scenario could never occur if “Governance by Cost Consequence” as enunciated by IBCM is followed.
ERC 11. The enforcement agencies also might consider the formation of ethics and compliance advisory groups composed of academics, private sector ethics officers, and retired government enforcement officials.
IBCM: Establishing IESB – International Ethical Standards Board is an absolute must, with about half-a-million certifying firms of professionals worldwide. If Balance Sheet is certified as per IASB standards so shall be the Statement of Accountability by IESB Standards.
ERC 12. DOJ and the SEC might provide case studies and aggregate statistics that demonstrate the impact of corporate ethics and compliance programs on enforcement decisions. They also might provide additional guidance about what the department expects from business.
IBCM: Sure they can. Quote from the book: “Justice Stephen Breyer has brought out with much force and clarity the importance of paying ‘attention to purpose and consequence’ in interpreting a democratic constitution, emphasizing the role of ‘consequences as an important yardstick to measure a given interpretation’s faithfulness to these democratic purposes.” Cost Consequence is the main objective of the book IBCM and “impact of corporate ethics and compliance programs” means the favorable effect of such programs on the study of cost consequence.
ERC 13. The SEC could encourage publicly traded companies to increase the visibility of their ethics programs—for example distributing their codes of conduct to shareholders, or making portions of their compliance training available to investors.
IBCM employs real-time monitoring of 5 areas [see 10 above] that is displayed in public for all to see. In future investors’ decision will solely be on this information on Governance, that SEC must take note of vis-a-vis the Financial Results that will have a minor role to play. IBCM extensively analyzes, particularly Article 8. Codes of conduct for public officials. IESB is common for both Corporate and Government.
ERC 14. The US Sentencing Commission could create an advisory group on Chapter 8, similar to its advisory groups for other portions of the Federal Sentencing Guidelines. Chapter 8 defines an effective ethics and compliance program for consideration in sentencing, and it also provides a de facto template for the design of ethics and compliance programs more broadly.
IBCM: IESB shall include under Corporate Governance a check-list common to all for the purposes of Governance Reporting as per the de facto template mentioned herein for the design of Ethics and Compliance programs. So does UNCAC an exhaustive list of recommendations under Article 60: Training and Technical Assistance. This together could form part of the Governance Reporting System as enunciated by IBCM for IESB to assess and make public.
ERC: 15. Supporters see a historic reform that will help restore shattered public trust that the government can deter wrongdoing, protect the public from fraud and punish transgressors. Others, including former Securities and Exchange Commission (SEC) chairmen Arthur Levitt and Richard Breeden, are dubious. “I certainly don’t think it would prevent the turmoil coming up, and I doubt very much it would have had much impact on the turmoil we have just experienced,” Levitt, a Democrat, said at a recent Washington forum sponsored by the Bloomberg news agency. “You might surmise from that that I’m not a fan.”
Breeden, a Republican, suggested that the 2008 collapse was less about rules than those who enforce them, observing: “Regulators had the authority to control that and eliminate it. We can keep passing laws, but if the regulators don’t have the backbone to enforce the rules and to be realistic, then that’s a different problem.” President Obama, a strong supporter of the new rules, concedes: “For these new rules to be effective, regulators will have to be vigilant.”
IBCM: Quote from IBCM: “Governance reporting standard as of now is comparable to the sports reporting of the pre-radio era.”…”The three criteria set for a functional Governance are: 1. Real-time Monitoring, 2. Cost Consequence and 3. People Participation.”
The three criteria would certainly prevent the turmoil coming up again. Governance Reporting System must change, no doubt.
ERC16. The Great Recession and the government response have focused our eyes on the financial sector, but doubts about regulatory effectiveness extend into other areas as well ..the disaster on British Petroleum’s (BP) Deepwater Horizon drilling platform in the Gulf of Mexico. ..The saga of the U.S. Minerals Management Service (MMS), which approved the BP drilling site, now seems a textbook case of “regulatory capture,” in which regulators begin to serve the interests of those they are supposed to regulate rather than represent the public interest… depicts a culture of corruption at MMS
IBCM extensively analyzes the aspect of Ethical Responsibility, defined as – Quote:”the state or position of being responsible for the resources entrusted to the people to run a government of the people, by the people and for the people, including the delegation of authority for the governance of the said resources to those who are entrusted with the usage. And Fiscal Responsibility – Individual entrusted to manage and administer the resources authorized by the Ethical Responsibility for the benefits of the people.” ..Free enterprise is an expression of freedom, whereas Ethical Responsibility is an expression of liberty, that threshold values emanate to bridge Ethical and Fiscal Responsibility. Unquote
This understanding is crucial to the governing aspects of Government and Corporate. BP is only a small disaster compared to the Inside Job perpetrated by the Corporate affecting the World Economy. Governance it appears has never been brought into focus at any time, even now. “Regulatory Effectiveness” is feasible only if Governance is measured and there is no other way. “Supposed to regulate” reaffirms the standpoint of IBCM – “Collectively they own only one Responsibility – Fiscal. If this is understood then there will be no chaotic drama of escapism between the Government, Regulatory Authorities and the Corporate” Never give an opportunity for one blaming the other, including external Auditors being blamed for the Banking Crisis.[http://wp.me/p18MVb-W]. One will continue to say, “I certainly don’t think it would prevent the turmoil coming up”. Governance, sir, it is Governance.
The White paper has posed some questions:
ERC 17. Is former SEC Chairman Breeden right that even the best crafted regulations are only as good as the regulators who enforce them?
IBCM: What about US Constitution? The three wings of the Government ensure by their action the supremacy of the Constitution and at anytime they fail to enforce it, Quality of the substance never diminishes. When a Regulatory Framework is created it is as good as its Quality, irrespective of the Action process that may or may not ensue. That Quality is nothing to do with the Regulators.
IBCM begs to differ.
ERC 18: Do regulatory adjustments make us safer or do they just provide the illusion of safety?
IBCM: In April 2007 SEBI – Securities Exchange Board of India introduced ‘Mandatory Grading’ for companies based on the rating agencies’ assessment of company’s fundamentals and considers the parameters such as earnings per share, financial risks, accounting quality, corporate governance and management quality, before an IPO. [See, http://wp.me/p18MVb-Q].[These are the five areas mentioned in 10 above]. It was an excellent move but none of the Rating Agencies including CRISIL or ICRA were capable of grading for such terms as management or accounting quality. They continue to do so but after the IPO everything is assigned to the dustbin. As of now the investor has no clue as to the regulatory adjustments of this move and certainly would discard the grading as an illusion.
IBCM fully supports this regulatory adjustment. Rating Agencies can learn from IBCM as to how this can be correctly measured. This is a valuable information, not only for the investor during an IPO but also to Financial Investment such as PE or Banking sector to watch out the Governance aspects rather relying on a Balance Sheet produced once in a quarter. When the three criteria of Governance as stated above is watched these investors could take timely action before the disaster occurs, be it Lehman Bros or BP.
IBCM will make the regulatory adjustments safer but as of now they are worse than the illusion of safety, a misguidance of triple A rating just before the collapse eliciting ‘Holy Cow’ response from the French Minister.
IBCM fully supports this regulatory adjustment. Rating Agencies can learn from IBCM as to how this can be correctly measured. This is a valuable information, not only for the investor during an IPO but also to Financial Investment such as PE or Banking sector to watch out the Governance aspects rather relying on a Balance Sheet produced once in a quarter. When the three criteria of Governance as stated above is watched these investors could take timely action before the disaster occurs, maybe Lehman Bros or BP.
IBCM will make the regulatory adjustments safer but as of now they are worse than the illusion of safety, a misguidance of triple A rating just before the collapse eliciting ‘Holy Cow’ response from the French Minister.
ERC: 19 Do government rules and fines make a difference in promoting safety, sound environmental practices, and other desirable conduct?
IBCM “The Quality of a substance cannot be separated from it, nor the work associated with it.” If Government rules are Quality the Action process ensures the work associated with it. Rules and fines will make lot of difference in promoting safety and the rest, if Singapore is an example to quote.
ERC 20: What is the relative effectiveness of self-deterrence vs. enforcement?
IBCM ensures, by assessing self-deterrence as well enforcement independently, the relative effectiveness that is comparable. Before reaching the optimum level of task accomplishment the data between the two would be an interesting study as to how they grade themselves of their responsibility. The statement of Accountability, prepared independently, is comparable between the two as well to any other such statement of any substance anywhere.
ERC 21: Can private sector efforts build on government regulation to successfully deter potential misconduct?
IBCM: ranks every substance under the five categories, mentioned under 10 above independently. Reaching an optimum level for each of these should of course be the aim of every corporate but it is not possible to do so without exceeding the minimum requirements set by the government regulation setting benchmarks much above the rest. They will have to build on the minimum level set.
ERC 22: Can government enforcement agencies and private sector compliance officers develop a partnership to strengthen deterrence?
IBCM: Both have their own Responsibility clearly cut out. IBCM strongly recommends to establish IESB – International Ethical Standards Board that shall certify both independently.
ERC 23: Are rules the answer? Or, do we need to do a better job of building a culture of ethics that instills a personal commitment to integrity?
IBCM: The three criteria set for a functional Governance is an important aspect of building a culture of Ethics. The foremost of the three is the public participation. The main case-study of IBCM is the analysis of Ch II Preventive Measures of UNCAC. Article 13 ensures participation of society whereas Article 10 ensures Public reporting. By Real-time monitoring it means to have a continuous data on various aspects of Governance giving a single ranking to the organization, from 0 to 5 with 5 being the optimum level. It is not that easy to reach the level. By public reporting it means for the public can log on to the organization and study the level they are in at that point of time.
Article 10 will ensure the job of building a culture overall for every organization be it Corporate or Government. Article 10 will ensure the fate of the government with the voters and the fate of the corporate in the stock market bringing in entirely new set of companies unheard of hitherto.
ERC 24: Have we simply reached the point where regulating corporate conduct is an impossible job?
IBCM: It brackets both the Government and the Corporate alike to Fiscal Responsibility. Regulating Corporate conduct or Government Conduct? Where is it now as it has never been and yet to start? Bring in IBCM you bring in ethics – corporate as well Government, for IBCM treats both, with great respect, as a substance.
Conclusion: Agreed about Inside Job, what’s the way out. http://wp.me/p18MVb-w. We got to look ahead and get the change effected and not ‘“I certainly don’t think it would prevent the turmoil coming up”. ERC can initiate this action with another White paper, today and not the usual twice in a year agenda.
Jayaraman Rajah Iyer
Author of Inactivity Based Cost Management:
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