Venrice R. Palmer
Copyright © 1999 by Venrice R. Palmer. All rights reserved.
A corporate compliance program is designed to create within a company an atmosphere that discourages the company's employees and agents from engaging in conduct that is illegal. Such conduct can include unlawful discrimination in hiring or firing employees, improper disposal of environmentally hazardous substances, disregard of federal tax laws, insider trading of securities, or violation of copyright and trademark laws. Sometimes such illegal acts are intentional and blatant, but often illegal or unethical conduct by employees is the result of ignorance or carelessness.1
The push for corporate compliance programs has accelerated in recent years, especially as a result of the 1996 opinion of Chancellor Allen in the Caremark matter. In Re Caremark International Derivative Litigation, 1996 WL 549894 (Del. Ch. Sept. 25, 1996), Caremark International, a provider of patient care and managed health care services, pleaded guilty to paying physicians "referral fees" and other sums that were prohibited by federal law, and paid fines and reimbursements to insurers of $250 million. In an ensuing derivative suit, shareholders alleged that the directors breached their duty of care by failing to supervise the conduct of Caremark's employees.
The shareholder claims were settled. In approving the settlement, the Court concluded that "there is a very low probability that it would be determined that the directors of Caremark breached any duty to appropriately monitor and supervise the enterprise." The Court went on, however to discuss the directors' general responsibilities over legal compliance, stating that the directors' duty of care requires them to ensure that a corporation has a reporting system that provides adequate and timely information to management and the board concerning the corporation's compliance with laws. The Court noted that the federal guidelines for sentencing corporations provide leniency where the corporate defendant had a compliance program in place, and observed that any rational director acting in good faith would have to ensure the existence of a compliance program so that the corporation could take advantage of the leniency provision in the event it faced criminal prosecution.
Delaware law permits a corporation's charter to contain a provision limiting the liability of directors for breach of fiduciary duty. However, the limitation is ineffective where the directors do not act in good faith. Caremark suggests that directors may not be acting in good faith if there is a sustained or systematic failure by them to ensure that the company has compliance programs in place and to oversee those programs. Such failure by the directors could make the limitation of liability unavailable.2
Moreover, the Securities and Exchange Commission ("SEC") has also joined the fray. On September 30, 1997, the SEC issued a cease and desist order by consent against W. R. Grace & Co. ("Grace") arising out of material omissions in Grace's proxy statements for 1993 and 1994 and its Forms 10-K for 1992 and 1993. Grace failed to disclose substantial retirement benefits paid to J. Peter Grace, Jr., its long-time Chairman and CEO ("Grace, Jr.") (since deceased) and a proposed sale of a Grace subsidiary to Grace, Jr.'s son ("Grace III"). Since portions of the proxy statement were incorporated by reference into the 10-K, Grace was also charged with violating the 10-K rules. No individuals were charged. Simultaneously, the SEC issued a report of its investigation. 3
In connection with the preparation of Grace's 10-K and proxy material, questionnaires were circulated to directors and officers which, among other matters, asked them to report any insider transactions or benefits that the company should review under its securities law disclosure obligations. Although several officers and directors were aware of these insider matters, no one reported them. The SEC said that Grace's officers and directors failed to fulfill their obligations under the federal securities laws. Without taking the steps necessary to confirm their assumptions, they each assumed that Grace's existing procedures for ensuring public disclosure of corporate events and transactions as required under the securities laws would be effective. The SEC concluded that:
An officer or director may rely upon the company's procedures for determining what disclosure is required only if he or she has a reasonable basis for believing that those procedures have resulted in full consideration of those issues. . . . Procedures or mechanisms established to identify and address disclosure issues are effective only if individuals in positions to affect the disclosure process are vigilant in exercising their responsibilities.4
Among other things, the Grace matter stands for the proposition that directors may not assume that an existing compliance procedure is effective in identifying transactions that are ripe for disclosure. Directors must take an affirmative stance and 1) take their corporations' compliance procedures seriously and 2) raise with counsel any matter that a director feels may not have been identified by the compliance procedure.
In part as a result of Caremark and Grace, the legal community is ever more concerned that their corporate clients have appropriate compliance programs in place. There is a general concern that any absence of procedures, or the use of procedures which may not be considered reasonable and effective, may subject directors to liability. This article will briefly describe the author's views5 on compliance programs in general, with a specific emphasis on the use of codes of conduct as the point of departure for compliance efforts.
The purpose of a compliance program is fairly simple — to deter wrongdoing by corporate agents and in some cases third parties and if wrongdoing occurs nonetheless, to detect that wrongdoing and bring it to the attention of management. This duality of purpose bridges the fine line between encouraging employees to act appropriately and penalizing them if they do not.6 With today's regulatory and prosecutorial climate, companies must have mechanisms in place to detect and prevent violations of law and of their own ethical principles and internal operating procedures.7 The program may be directed at getting employees to conform to ethical standards and dissuading them from engaging in wrongdoing. The "wrongdoing" may take the form of violation of domestic statutes and regulations which affect the company's business (such as OSHA, antitrust and environmental protection laws). In addition, every company has its own internal policies that it expects its employees to observe. While not strictly a legal requirement, these policies often embody the company's concepts of loyalty, fair treatment for clients, customers, fellow employees and subordinates, as well as other key principles and are important to the success of the business.
One of the concrete benefits of a compliance program, as noted by the court in Caremark, is that corporate criminal sentences may be lessened. In order for this to occur, the program must meet the tests under the Federal Sentencing Guidelines, which require the corporation to have "compliance standards and procedures . . . that are reasonably capable of reducing the prospect of criminal conduct."8
The procedures are not a guarantee that no wrongdoing will occur. No system, however sophisticated, could do so. However, if thoughtfully done the compliance program should decrease the incidence of violations of law and company policy. In most cases, this should arise due to the fact that employees are mainly honorable and conform their conduct to expectations once they are properly instructed. In a few cases, the desired effect will result only from fear on the part of certain employees that their wrongdoing will be detected.
The way to ensure that everyone in the organization is familiar with the policy and knows that the company is serious about it is to make it clear that it comes from the top — in this case, from the chief executive officer.9 The existence of the program should be communicated to employees directly by the chief executive officer. The board should review and approve any policy or compliance procedure and be satisfied that it is likely to achieve the desired results. It should review the performance of the program at regular intervals.
Enforcement of the policy must be placed in an officer who is senior enough to engender respect for the compliance process and who has enough clout to confront possible transgressors regardless of their stature in the corporate hierarchy.10 Preferably, he or she should report directly to the CEO, if not directly to the board or a committee of the board. Whether that person is called an "ethics officer "an "ombudsman" or some other term, he or she is a necessity in any compliance effort.
Compliance is not achieved by force. There must be cooperation on the part of employees. Those who feel they have been unfairly treated as well as those who believe they have information about a possible legal or policy lapse, must feel comfortable voicing their complaint. If they do not, the company runs the risk that a compliance issue may fester and explode, with unfortunate repercussions. If employees who should be approaching the ethics officer refrain from doing so because they do not trust the person or the process, they will find a person — and a process — whom they feel they can trust, oftentimes a lawyer or possibly the media, the government or other avenues. The officer needs to be respected by employees as a whole, which will be earned as employees observe how the ethics officer deals with complaints and the employees involved in them.11 If employees perceive the person as fair, they are more likely to cooperate in any investigation. If the officer expeditiously resolves complaints in a manner perceived as just, employees are more likely to be willing to voice their complaints.
A good way to begin a compliance program is by preparing a code of conduct. There are many types of codes, but the term is used here to mean a set of principles or guidelines that embody the ethical principles of an organization and exhort employees to respect those principles and be law-abiding.12 Some codes are very brief and attempt only to embody a general philosophy of good business conduct. Codes of conduct can be general or specific. A "general" code would attempt to cover principles of ethics and express the organization's general commitment to abide by the various laws and regulations that affect its business. There is no set pattern for the content of codes. They tend to cover areas such as conflicts of interest, employee receipt of gifts from vendors, misuse of confidential information, foreign bribery, environmental protection, political contributions, antitrust issues and many other areas of corporate concern.13 Other documents that are entitled "codes" go into a fair amount of detail and set forth the specific rules and regulations to be followed by employees in particular aspects of the company's business rather than just listing general principles. Some are more or less in between.14 Much depends on the type of conduct the company is trying to address.15 "Compliance procedures" on the other hand, are those mechanisms that are designed to enforce a code of conduct and detect violations of the code.16
A code reflects the company's "corporate character." It reflects how the company wishes to be known in the communities it touches.17 It is not just a personnel policy that gets dusted off only when issues arise.18 Codes have been in existence in some form for decades. They tended to proliferate beginning in the 1970's as a partial response to a series of corporate scandals, including the foreign bribery scandals of the 1970's and the insider trading scandals of the 1980's.19 Certain types of businesses are required by law to have a code of conduct or code of ethics.20 Government contractors, for example, maintain codes, in part to demonstrate that they are "responsible" companies, a legal prerequisite for such companies.21
However a company approaches the task, it is an essential part of any compliance program to have a set of principles that inspire employees to follow a moral high ground in their actions and decision-making, instead of just memorizing a detailed list of "do's and don'ts." In a sense, this is the noblest and possibly the most effective way to proceed — by stating the principles of the organization for all to see and urging employees to follow those principles.22
Before drafting a code, the company should dig into its history and resurrect its own prior statements about institutional identity and ideals. The code must fit the organization's unique character and modus operandi.23 It should collect information to determine what courses its peer companies are taking in this area.24 There are numerous such sources, including trade and industry groups and associations25 and publicly available literature such as the materials from this and other courses. Some law firms have experience in this area. Do not overlook the advantages of the internet, which also has numerous helpful resources. Some companies proudly discuss their codes in their annual reports or other publications. Take comfort from the fact that, because so much has been written on this subject, you do not walk alone.26
Begin by identifying the company's ideals and business philosophy.27 Approaches vary. Make sure that relevant departments of the company are exposed to each draft (e.g., audit, ethics, human resources, law and operating departments).28 Each offers a different point of view. For example, audit can evaluate the difficulty of auditing compliance with certain policies. Ethics officers know the past ethics policies of the business. Human resources knows the company's employment policies. Legal knows U.S. law and can help determine foreign law where appropriate. Operating departments are on the scene and know the local situation, and the personnel who will be covered by the code.
When extending coverage of a code to either third party or company-owned operations abroad, be careful of thinking that what is good for America is good for the world.29 Other countries have different customs and traditions.30 For example, it may be fine to support the rights of foreign workers to unionize, with the thought that workers who band together stand a better chance against management of factories from which the company imports goods. However, unions may be treated differently in other legal systems and may be regarded differently in other cultures (e.g., they are thought to be associated with guerrilla movements in certain countries31 ). Also, be wary of making broad assumptions. Forcing a factory to release under age workers does not necessarily mean these workers will go to school. Their families may not be able to afford to educate these children and they may end up in a sense worse off than when they were working, if factories are forced to discharge them without an economic safety net.32
The code should use simple principles that are easy for employees to grasp. In most instances, it will be addressed to an audience comprised not only of well-educated executives and high level professionals and technicians, but of employees in positions requiring less formal education and analytical skills. Regardless of their position, all employees are expected to abide by the code, which they can hardly do if they do not understand it. There will inevitably be questions and ambiguities and a need for interpretations of the policy. The code should indicate where employees may raise these issues.
Implementing the code and monitoring adherence to it are essential. Simply put, the company needs to educate employees about the requirements of the code and to make sure that the code is being followed. There needs to be a mechanism to ensure that violations are not only uncovered, but dealt with using the appropriate level of response.33,34 The following are some of the key principles that should be followed:
1. Publicize. The initial requirement is to make sure the code is widely circulated.35 If employees do not know about it they cannot follow it. Consider holding training sessions to inform employees of the existence of the code and how to comply with it.36 Third party vendors should receive copies of the code if they are required to adhere to it, and should be given the opportunity to ask clarifying questions.
2. Establish Accountability. Management of every department and division and at every level37 must absorb the code and make it clear that employees are expected to do so as well. Only when employees see that their managers take the code seriously38 and use it as a working document in their decision-making will employees accept the fact that adherence to the code is a fact of daily life.39 The manager of a division or department should be accountable for code compliance by his or her employees. Make code compliance a factor in performance appraisals and incentive compensation awards to senior managers.40 If surveys or questionnaires indicate a lack of appreciation for compliance procedures by the personnel in a particular department or if there has been a significant compliance problem in a manager's area, then the manager should be held to task for the failure.
3. Reinforcement. There should be periodic reminders about the code and the fact that the company expects employees to comply with it. References to the code and its "lingo," i.e., any key concepts or "buzzwords," as well as any special logos or symbols which serve to identify the code, should be used as a leitmotif and repeated in communications to employees where appropriate.41 The principles in the code should be referred to in routine publications distributed to employees. The company's adherence to ethical principles should become part of its corporate culture.
The DOL has stated that "monitoring is critical to the success of a code of conduct: it also gives the code credibility in the eyes of consumers and other interested parties."42 Discovery of a problem by the government, news media or others will look even worse if it is also discovered that a code was adopted and never monitored. The following are some of the key principle that should be followed:
1. Internal Reporting. The appropriate people in the organization should be made aware of code violations and their resolution. Periodic reports should reach the top levels of the organization including the CEO and the board,43 and any board committee involved in the monitoring of ethical behavior. Brief summaries of the resolution of investigations or the interpretation of ethical norms given to employees should be made available periodically (on a hypothetical basis and without identifying the individuals involved).44 A logical procedure would be to post this information on the company intranet and notify employees by e-mail on a quarterly or semi-annually basis that updated ethical interpretations are available. The fact that the company devotes resources to an ongoing communication program demonstrates the company's commitment to the program, and should help stimulate employee commitment.45
2. Internal Audit Compliance Surveys. Some internal audit departments conduct periodic checks of employees' compliance with internal policies, for example, through a review of disbursement records and travel vouchers, and a comparison of corporate expenditures to authorizing resolutions.
3. Employee Questionnaires. One way of following up is the use of periodic questionnaires circulated to employees requesting data as to their adherence to corporate policies. This method has the obvious drawback of possibly eliciting self-serving responses. However, it serves as a reminder to employees of the existence of the code, prods them to follow it and suggests that the company does look for violators. A false response might provide an additional basis for discipline, if a code violation is independently discovered.
4. Anonymity. Fear of retaliation for "whistleblowing" is a major issue. Employees should feel that they may ask questions on an anonymous basis if they wish, or report suspected compliance problems to a responsible official without revealing their identities.46
5. Requests of Outside Third Parties. Companies sometimes ask third parties with whom their employees deal on behalf of the company, to report any violations of policy directly to the company. How likely it is that a vendor would make such a report is questionable, but there is no harm in asking. At least it indicates that the company is attempting to cover all the bases, i.e., contacting those most likely to know of violative conduct by its employees.
6. Integrity. If employees are being asked to act with fairness and equity in all that they do, then they must also be treated with fairness and equity in the course of an inquiry into a possible compliance breach. If discipline is warranted, it should be appropriate to the circumstances of the violation. There should be a perception that the person accused was treated fairly and was neither dealt with lightly nor used as a scapegoat because of his or her stature (or lack thereof). On occasion, the company may need to have an outside third party investigate sensitive allegations. Any perception of unfairness will likely cause employees to disrespect the entire compliance process, thereby endangering one of the most important factors to the success of the procedure — the cooperation of employees.47
7. Foreign Factories. Follow-up monitoring and enforcement of code compliance by foreign factories (especially those owned by third parties from which the company imports wholesale goods) is especially difficult because of the geographic distances and cultural differences involved. Vendors must be made aware that companies take their codes seriously. Companies should be prepared to monitor the code in these factories, through internal personnel, independent agents or both, including the use of scheduled and unannounced factory visits.48
Decide on the form that monitoring will take. The first line of attack is self-monitoring by the factories themselves. The are on the front lines. Require factories with which the company deals to sign an acknowledgment that they have received the code and intend to abide by it. Impress upon them that the company is serious about having the code enforced. Monitoring by company staff (e.g., buyers, quality control staff, internal audit, special units) is oftentimes the second line of defense. These employees periodically visit factories for quality control, inspection, financial review and similar purposes. Since they are already there, they should keep their eyes and ears open to possible code violations. Of course, they need to be instructed in what to look for, either by company personnel or by an outside agency. Part of this training should involve the development of an audit instrument49 so they will know the questions to ask and the items to look for.
Some companies use independent monitoring agencies.50 Activist organizations tend to favor independent monitors because they believe that importing companies have an interest in hiding or downplaying violations. Several organizations, including accounting firms, religious organizations and others, offer their services as monitors.51
Do not overlook the workers themselves as possible monitors. If the code is translated into the local language and posted in the factory, the workers themselves may report violations. Certain companies have done this (Sara Lee, The Gap) and the Apparel Industry Partnership report specifically recommends this method as an effective enforcement tool. When company representatives visit factories, they should not be afraid to speak to randomly selected workers.
8. Review by Directors. The board Audit Committee or another appropriate board committee, and the entire board, should receive periodic reports on the results of compliance efforts. Any problem of significant magnitude should be specifically reported on.
9. Review and Revise. The company should keep current on developments in law and society which may require revisions to the code.52
Creating effective compliance procedures is no easy task. However, in this post-Caremark era, companies have an additional incentive to engage in this effort. By following certain central principles a company can make a good beginning.
Sample of Publicly Available Codes of Conduct
Suggested Factory Code of Conduct-Retailer/Manufacturer (primarily for those which import from foreign factories)
Suggested Code Implementation Procedures for Retailer/Manufacturer (primarily for those which import from foreign factories)
Vendor Acknowledgment of Code of Conduct
Report of Inquiry into Alleged Violation of Code of Conduct
1. Dennis J. Murphy, Esq.,"Legal Reviews, Compliance Programs and Codes of Conduct," monograph of Frost & Jacobs LLP, 2500 PNC Center, 201 E. Fifth Street, Cincinnati, OH 45202-4182, (hereafter "Dennis Murphy").
2. Justice Norman E. Veasey of the Delaware Supreme Court has not indicated whether the Court would adopt the reasoning in Caremark, but has said that "`it would be unwise for a board to adopt an ostrich attitude and do nothing'" and that "`boards should establish — and monitor — reasonable law compliance programs.'" (Quoted in Bruce A. Hiler and Ira H. Rapaelson, "When Reasonable Reliance Isn't Enough: The Evolving Standards For Board Oversight", 12 Insights 1 (Jan. 1998), at 6.
3. Cease and Desist Order, Release No. 34-39156, (Sept. 30, 1997); report of investigation Release No. 34-39157 (Sept. 30, 1997)
5. This article represents the experience and research of the author only and should not be taken as representing the view of any present or former employers of the author.
6. "Compliance programs are not ends in themselves: they are risk management tools to help the company achieve its broader goals of enhancing shareholder value and profitability by being a responsible corporate citizen." Dana H. Freyer, Esq. and Benjamin B. Klubes, Esq., "A Practical Approach to Implementing a Corporate Compliance Program for Smaller Companies", 13 Preventive L. Reporter 33-36 (Winter 1994)., in Corporate Compliance After Caremark (New York: Practising Law Institute, 1997) at 487 (hereafter "Freyer and Klubes").
7. ". . .[T]here are essentially two kinds of corporations where business ethics are involved. The first has a corporate culture, created by corporate leadership, that embraces business ethics. In such a corporation, systems are designed to identify ethical (or criminal) lapses and to ensure that information about these lapses is communicated to the appropriate level in the chain of command; employees are trained to resist cutting corners and to hold their colleagues to the same standards; good corporate citizenship is rewarded in promotions; and, when it comes time to decide whether and how much information should be revealed to the government and others outside the company, those decisions are made with due regard for ethical considerations.
"The other type of corporation is not usually actively corrupt. Rather, it lives — and dies — by the age-old mistaken belief that what you don't know, won't hurt you. These companies have no working systems to identify and report malfeasance. Employees regularly cross ethical lines in the name of the bottom line. And, when trouble is discovered either within the corporation or without, surprise gives way to an instinct for stonewalling that often overtakes reason.
"Now for the thesis, which by now should be obvious — the second sort of corporation is more likely to run into trouble than the first, and, when trouble comes, it tends to be severe.
"My three years in government have only served to convince me further of the wisdom of the first corporation and the folly of the second. Nevertheless, I continue to be amazed by the sheer number of companies and corporate officers that fail to accept the nearly self-evident truth of the thesis I have described, and continue (needlessly) to risk ruin for themselves, their employees, and their shareholders.
"The shortsightedness of this approach should be particularly clear today, because the Department of Justice is aggressively pursuing corporate wrongdoing." REMARKS of JAMIE S. GORELICK, Deputy Attorney General of the United States, at The Conference Board's Business Ethics Conference, May 22, 1996, New York City, quoted in 5 Corp. Conduct Q. 1 (1997) (hereafter "Gorelick").
8. United States Sentencing Commission, Guidelines Manual, Sec.8A1.2 comment (n.3(k)(1)) (Nov. 1998). The guidelines do not give a corporation step-by-step instructions as to how to accomplish this result, leaving that task to the imagination and creativity of each enterprise. However, Chapter 8 of the guidelines sets forth four points that each organization should analyze in preparing its program: 1) size of the organization (larger organizations should have more formal programs); 2) any risk inherent in the organization's business; 3) industry practice or any standards required by government regulation; and 4) any prior violations it has had. Id.
9. "Of the Fortune 250 companies studied [in a September 1994 study of compliance programs by Price Waterhouse], approximately twenty percent had compliance programs that we characterized as leading edge. These companies operate in a variety of industries, including energy and chemicals, healthcare, manufacturing, high technology and defense contracting. The companies with leading edge compliance programs had many distinct business objectives and unique compliance risk profiles. However, the executive managers of these organizations had at least one view in common. Their company must have a strong compliance program which will discourage employee wrongdoing and detect improper employee conduct. The high importance that they gave this matter_the "tone" of the program_was set at the very top of their organization and communicated effectively to all employees. "(See Gary Pell, Price Waterhouse Internal Audit Services, "Corporate Compliance Programs: Leading Edge Practices", 5 Corp. Conduct Q. 3 (1997) (hereafter "Pell").
10.The sentencing guidelines require that "high level personnel" have responsibility for the procedure if the company is to get the benefit of the sentence reduction that compliance procedures afford. Gregory J. Wallance, "Corporate Compliance Programs under the Organizational Sentencing Guidelines", in Corporate Compliance After Caremark (New York: Practising Law Institute, 1997) at 179.
11."The ombudsman is one of the best potential compliance tools available, yet is one of the least recognized by corporate counsel. An effective ombudsman can serve to vent problems internally, before they explode externally. The ombudsman serves as outlet for customers, competitors, suppliers, and employees, encouraging communication with the corporation before communication with the press or a lawyer." Joseph E. Murphy, Corporate Compliance Programs: Counsel's Role, ACCA Docket (Fall 1989) at 35 (hereafter "Joseph Murphy").
"Generally speaking, if there is misconduct in one division of a company, there will be someone who will want to talk about it. It is better to provide an internal outlet for that conversation. Consider the alternatives for the employee with a story to tell: the press, regulators, and/or the local U.S. Attorney. None of these options is likely to produce a good result for the company." Karl A. Groskaufmanis, "Designing an Effective Overall Compliance Program: Ten Questions Every Company Should Ask", 3 Corp. Conduct Q. 1 (1997) (hereafter, "Groskaufmanis").
12.The Department of Labor ("DOL") has characterized codes as follows (relating to the codes of companies in the apparel manufacturing and retailing industry):
Corporate codes of conduct are policy statements that define ethical standards for companies. Co porations voluntarily develop such codes to inform consumers about the principles that they follow in the production of the goods and services they manufacture or sell. Corporate codes of conduct usually address many workplace issues — including child labor — and, according to some observers, are part of a broader movement toward corporate social responsibility.
"The Apparel Industry and Codes of Conduct: A Solution to the International Child Labor Problem?," (Department of Labor, Bureau of International Labor Affairs, 1996) p.12 (hereafter "DOL Apparel Industry Study").
13."More detailed compliance policies and procedures in areas that are especially complex or potentially troublesome, such as antitrust, environmental, health and safety, and securities law should be distributed to those employees whose work or status implicates that area." (Freyer & Klubes, supra n.6 at 490).
". . . [E]nsure that the code is backed by specific policies in various areas such as gift giving, conflict of interest, respect for personal dignity and workplace diversity, post-employment contracts, and international business practices." David Nitkin, "HorizonScan: Ethical Assurance Tools For Chief Ethics Officers", 7 Corporate Ethics Monitor 4 (Aug. 1995) (hereafter "Nitkin").
14.See, e.g., "Setting the Standard," (code of Lockheed Martin Corporation).
15.Many codes that exhort foreign factories that supply goods to domestic companies to comply with their local labor laws and to respect the human rights of their workers are very general in some respects and may simply, for example, that factory workstations should be "well fit" or "well lit" and "comfortable." (See codes of Wal-Mart and Russell Corporation included in DOL Apparel Industry Study, supra n. 12).
16.See, e.g, Harvey L. Pitt and Karl A. Groskaufmanis, "Minimizing Corporate Civil and Criminal Liability: A Second Look at Corporate Codes of Conduct" 78 Geo L. J. 1559, 1604 (Jun. 1990). (hereafter, "Pitt and Groskaufmanis").
Of course, some compliance programs include both an introductory set of guiding principles and a more detailed set of instructions for employees' handling of various matters that arise in the business. See, e.g., "Model Hospital Compliance Program — Form," Withrow McQuade Olsen.
17.". . .[P]ragmatic factors militate in favor of adopting a code. One factor is communicating an intent to stay well within the law. To the extent that a corporate code actually sets a serious tone from the top, the adoption of a code is an important way to evidence that intent. As a corollary, codes of conduct inevitably facilitate and encourage the efforts of those employees who want to do the right thing. This may prevent precisely the specific types of employee misconduct that could subject a company to serious civil or criminal liability. . . . Finally, corporate codes may foster public goodwill in advance of any breach of a company's ethical and legal standards by an errant employee, and inspire public acceptance of a company's good faith after a breach. It behooves a public company to be perceived as a law-abiding co porate citizen rather than as a company that does not care. Similarly, once a breach of a legal or ethical standard occurs, companies do well to posture themselves as victims of their employees' wrongdoing, whether or not the law holds the company accountable. In the marketplace, public confidence is a precious commodity, and corporate codes can play a vital role in instilling and maintaining this confidence both before and after a dreaded employee defalcation." Pitt and Groskaufmanis, supra n. 16, at 1634, 1635 (footnotes omitted).
18."Codes are an [sic] means of communicating corporate values to all staff. They can be an effective way of letting staff know what are the ethical expectations of the employer, typically across a broad range of business responsibilities." (Nitkin, supra no. 13).
19. Questionable payments to foreign officials led to the adoption of the Foreign Corrupt Practices Act of 1977, 15 U.S.C. Secs. 78a, 78m, 78dd-1, 78dd-2 and 78ff, and "may have been the primary catalyst for the development of corporate codes." (Pitt and Groskaufmanis, supra, n. 16 at 1582).
20. E.g., investment companies and their investment advisers are required under Section 17(j) of the Investment Company Act of 1940 and Rule 17j-1(b) thereunder to adopt a written code of ethics (See Sec. 15 U.S.C. Sec. 80a-17(j) and 17 C.F.R. Sec. 270.17j-1(b)).
21. Pitt and Groskaufmanis supra n.16 at 1559, n. 208.
22. "We also focused on the `tone' of their compliance program [in the Price Waterhouse survey]. In doing this, we attempted to distinguish between programs which are essentially a list of do's and dont's (`rule-based' programs) and those which are based on a commitment to ethical values (`integrity-based' programs). `Rule-based' programs generally fail to address the root causes of misconduct and may be less effective at promoting ethical behavior in organizations. `Integrity-based' programs, whereby management's commitment to ethical values and promotion of ethical behavior creates an organization in which exemplary conduct is encouraged, generally appear to be the best way to prevent damaging misconduct. Companies in our survey with leading edge practices all employed integrity-based programs." (Pell, supra n. 9).
23. "One of the [United States] Sentencing Commission's minimum requirements is that the company have procedures reasonably capable of reducing the prospect of criminal conduct. That cannot happen unless the compliance program is tailored to a company's corporate culture. Each company has a corporate culture, an ethos, a way of doing things. The compliance program must be shaped by that culture and by the company's distinctive legal concerns, history and the measures that will work in its particular environment. . . . The bottom line objective is to develop a program that is workable." (Groskaufmanis, supra n. 11).
24. "`. . .[B]enchmark' the code. That is, assess its content, format, length and tone in terms of other codes at similar-sized companies and in similar businesses." (Nitkin supra n. 13).
"Because every corporate culture is different and changes over time, code drafters should attempt to tailor a code to their particular company, rather than simply copying the codes of other companies. This is not only desirable, but necessary because courts are more likely to give effect to a corporate code that has been tailored to the circumstances confronting the particular company. Courts may dismiss the mere adoption of another company's code as `empty formalism.' Moreover, by tailoring the code, counsel will ensure that the compliance program fits the company's needs." (Pitt and Groskaufmanis supra n. 16 at 1639) (footnotes omitted).
Companies may be willing to share their codes upon request. Some have been made public. See "Sample of Publicly Available Codes of Conduct" in Appendix A.
25. Some organizations are developing or have already developed codes that apply to an entire industry. For example, in 1995, the National Retail Federation, a retail industry trade group, issued its "Statement of Principles on Supplier Legal Compliance" which contains general ethical standards that retailers could insist that their suppliers follow. The Council on Economic Priorities, a research group headquartered in New York, has developed a model framework called "SA8000" to measure a company's compliance with ethical standards in areas such as child labor and health and safety. (See "Sweatshop Police," Business Week, (Oct. 20, 1997); see also "Council on Economic Priorities Accreditation Agency" and "Social Issues Service 1997 Background report J International Labor Standards," (Investor Responsibility Research center, 1997)) (hereafter "IRRC Labor Standards"). In May of 1996, American, European and Japanese toy manufacturers agreed on a code to govern the rights of workers in factories they contract with to produce toys. (See "If It's Broke, Fix It", Far Eastern Econ. Rev., (Jun. 20, 1996).
26. For example, in May of 1995, President Clinton announced his "Model Business Principles," which encouraged companies to adopt codes that are appropriate to their own circumstances. (See IRRC Labor Standards, supra n. 25). In August 1996, following on the heels of revelations that Kathie Lee Gifford's line of clothing marketed by Wal-Mart was made in Honduran sweatshops, the President announced the formation of a group to examine the problems and develop solutions. The "Apparel Industry Partnership," consisting of representatives from apparel and footwear manufacturers such as Nike, Phillips-Van Heusen and Liz Claiborne, as well as labor organizations, and consumer, human rights and religious groups, set about studying the conditions in foreign factories and drafting a code of conduct that could be available for adoption by the Partnership's members and others. (See "White House Press Release; Remarks By The President In Apparel Industry Partnership Statement," (The White House, Office of the Press Secretary, (Aug. 2, 1996). On April 14, 1997, President Clinton announced that the Partnership had issued its report and made public its recommended code. The code requires, among other things, that factories pay workers the higher of the local minimum wage or the prevailing wage, maintain a maximum workweek of 60 hours and observe a minimum working age of 15 (or 14 if allowed by local law). (This is essentially the age standard adopted by the International Labor Organization ("ILO"), an organ of the United Nations based in Geneva, Switzerland, in its Minimum Age Convention #138, although Convention #138 is more detailed and contains several additional exceptions.). Those companies that comply have the right to add a "No Sweat" label to the apparel they sell. (See Appendix A).
27. ". . .[E]ach code should begin with a broad statement of corporate policy. This suggestion is grounded less in legal precedent and more in the need to create an atmosphere in which the compliance program is likely to succeed. This is not an appeal to piety, but rather reflects an appeal to the bottom line." (Pitt and Groskaufmanis supra n. 16 at 1640).
28. "In order to manage the design, training and education, and monitoring and auditing of the program, the company forms a cross-functional Compliance Committee. The committee is generally composed of management representatives from the Office of General Counsel, Human Resources, Internal Audit, and, most importantly, Operations." (Pell, supra n. 9).
29. "Another step is to appreciate that foreign-based parent companies have codes that often need Canadianizing. The rules . . . pertaining to issues like insider trading, political contributions, employee benefits, and affirmative action are different here in Canada from other jurisdictions. Asking Canadian employees to follow American, British or some other country's regulations is not only inappropriate, it may also be illegal. Professional staff at aerospace and defence contract multinationals often have refused to sign transnational codes, requesting instead Canada-sensitive local ethics training as a surrogate for signing the parent company's code." (Nitkin supra n.13).
30. ". . . practices which make perfect sense in undeveloped nations can seem downright barbarous in more affluent lands." The Global Sweatshop, Far Eastern Econ. Rev., (Sept. 19, 1996), at 5.
31. See IRRC Labor Standards supra, n. 25.
32. E.g., "Sometimes [children] work because there's no school nearby, or because they can't afford the books and fees. Sometimes their wages are needed to help feed younger siblings. `We have to be very wary of simplistic solutions,' says Jane Armitage of the World Bank. `Families don't choose to send their children to work because they want to. They do it because they're starving.' And alternative ways of earning money — prostitution, for example — are even worse." (See "Did Child Labor Make That Toy?," Kiplinger's Personal Finance Magazine, (Dec. 1996)).
34. ". . .[I]t is important to realize that even when a corporation has designed and established a compliance program, it must constantly guard against complacency in the operation of that program. . . . After you have appointed ethics officers, created written standards of conduct and training programs, scheduled internal audits, designed systems for whistleblowers, and published ethics newsletters your most important work lies ahead of you — ensuring that the corporation, from the leadership on down, is actively committed to making these systems work." (Gorelick supra n. 7)
35. "As a first step, the company should provide each employee with a written version of the code immediately upon joining the company, and it should require each employee to certify that he or she has received, read and understood the code and will comply with its terms." (Pitt and Groskaufmanis supra, n. 16 at 1643).
36. See Kirk S. Jordan, "Compliance Training Is Increasingly Interactive," The National L. J. (Mar. 9, 1998) at. B13 (recommending the use of computerized training protocols).
37. "For a compliance program to be effective, all levels of management must be committed to making the program work. Initially, top management must publicly and actively get behind the compliance program. Because most managers follow the lead of the top management, a program that is not seen to have the support of top management will simply fail, no matter how strongly the general counsel or compliance officer pushes the program. If, however, top management emphasizes that compliance with all applicable laws and regulations is part of each manager's job responsibilities, a compliance program can succeed." Donald J. Zoeller, William J. Geller, "An Effective Compliance Program," N.Y.L.J. (Oct. 16, 1997). (hereafter, "Zeller and Geller").
38. "Line employees are often wary of corporate programs, knowing that management initiatives are frequently announced with great fanfare and then sink into oblivion without any real change in the work environment. Only when management demonstrates its commitment by making difficult choices in support of the program will employees truly listen to the message." (Zeller and Geller, supra n.37).
39. "The code should be blessed (and periodically reviewed) by the board of directors and the CEO and other senior officers must promote the code and be seen to be applying it scrupulously in their own activities." Laurence Hebb, "Corporate Codes of Conduct: Beyond Shareholders to Stakeholders," The Osler Outlook (Fall 1996), (publication of Canadian law firm Osler, Hoskin & Harcourt).
"At the heart of every effective program is the recognition that compliance, like other aspects of corporate performance, is ultimately a responsibility of the corporate line managers who control day-to-day business operations. The essential objectives of a compliance program are to insure that line managers give attention to compliance matters in their oversight of corporate operations and that compliance efforts are integrated with other day-to-day management practices and procedures." Richard S. Gruner, "Corporate Governance: Officer and Director Liability for Inadequate Legal Compliance Systems," The Preventive L. Reporter.
40.See Joseph Murphy, supra, n. 11.
See also Nitkin, supra, n. 13 ("One of the strongest reinforcements of ethical culture is to weave ethical expectations into performance appraisals as well as recognition, compensation and promotions planning. Profiling the positive behaviour of particular employees in [sic] helpful. So too is rewarding them financially.")
41."Constant reminders of the company's policies should never be far from the sight, or the minds, of those employees expected to comply." (Pitt and Groskaufmanis, supra, n. 16 at 1643).
42.DOL Apparel Industry Study at supra n. 12 p. 49.
43.See Joseph Murphy, supra n. 11 at 33.
44.Herbert Zinn, "ComplianceGrams: A Case Study In Communicating and Teaching Compliance," 4 Corp. Conduct Q. 1 (1997).
46."The key elements of a reporting system are straightforward:
(i) employees should be able to report potential violations to management confidentially; (ii) employees should be able to make reports without going through their immediate supervisors; (iii) retaliation for good faith reports by employees should be prohibited." (Freyer and Klubes, supra n. 6).
"In every compliance area-EEO, antitrust, environmental — there is someone in the company who knows `what is going on.' These potential whistleblowers — secretaries, auditors, retirees, mail clerks, disgruntled officers — can become a prime source for surfacing incipient problems before they reach the violation stage. But if employees are not offered a safe harbor within the company, someone they can trust to listen and take effective action when warranted, this valuable opportunity will be lost. The ombudsman is successful in this endeavor where others are not because the ombudsman can keep reports confidential and act as protector for the employee who wants to present a concern but is afraid of retaliation." (Joseph Murphy, supra n. 11 at 35).
"The company should also create a mechanism through which anonymous employee question and disclosures may be channeled. Many compliance issues may be in gray areas in which the law itself, much less its application, remains undefined. Employees should have a `safe harbor' to call counsel or some other individual to discuss issues of concern or to report possible violations. Companies that have established hotlines often find that the bulk of the calls seek clarification of the policy's operation." (Pitt and Groskaufmanis, supra n. 16 at 1644).
"The Sentencing Commission counsels courts to look for monitoring and auditing systems that indicate the company is making an effort to make its program work. What this means — in terms of hotlines, ombudsmen, compliance officers — will vary considerably from one company to the next. One element that should be common to all companies, however, is the guarantee of a safe haven for reports of code violations, promising anonymity and freedom from retribution to those who file complaints." (Groskaufmanis supra n. 11)
See An Interview of William Giffin, in Online J. of Ethics (Vice President of Ethics and Business Policy at Sears, Roebuck and Co., concerning the use of an anonymous "assist line").
47.". . . [T]he company needs to deal with the wrongdoers, no matter who they are. If the violation or violations are serious enough, the wrongdoers should be discharged. If less serious, other punishments should be imposed. The compliance program will lose its credibility if wrongdoers are not properly sanctioned." (Zeller and Geller, supra n.37).
48."UK Finds Slum Conditions at Home as Well as Abroad" Journal of Commerce (Oct. 25, 1996).
49.A recommendation of the Apparel Industry Partnership report. (See supra n. 26).
50.Penney Puts Muscle Into Sweatshop Effort, Says `Monitors or Else, Women's Wear Daily (Jun. 5, 1996). The Council on Economic Priority Accreditation Agency has reviewed and accredited several entities as qualified to review compliance with the Council's new "SA800" code of social accountability. The Apparel Industry Partnership, supra, n. 26, has created (with its labor union and church group participants abstaining) a new non-profit entity called the "Fair Labor Association" to monitor compliance with the Partnership's code. The new Association will pay part of the initial costs of a company's monitoring compliance with the Partnership's code. (See IRRC Corporate Social Issues Reporter Nov. 1998 at 16).
51.More on Nike's Overseas Labor Pain, Business Week, (Aug. 19, 1996).
52.". . . [H]as the code of conduct been revised in the last two years? There is no magical interval but, periodically, the compliance program should be reviewed and updated, to reflect new developments in the law and the company's experiences in implementing the program. The Sentencing Commission anticipates that modifications will be made as necessary, particularly if there is a breakdown and an offense occurs. Even in the absence of anything that dramatic, revisions represent one way a company's counsel can send a warning signal about changes in the legal or regulatory environment. Moreover, there will be bugs in every system. This review allows experience to shape the compliance program." (Groskaufmanis, supra n.11).
1. Code of Ingersoll-Rand Company
2. Code of South African Breweries Limited
3. Code of Lockheed Martin Corporation
4. Code of Halliburton Company
5. Code of Northern Telecom ("Nortel")
6. See "Model Hospital Compliance Program — Form," Withrow McQuade Olsen.
7. Apparel Industry Partnership Code.
8. U.S. Dept. of Commerce Model Business Principles.
9. In addition, the codes of about 37 companies can be found as appendices to the Department of Labor's Report entitled "The Apparel Industry and Codes of Conduct: A Solution to the International Child Labor Problem?," (Department of Labor, Bureau of International Labor Affairs, 1996).
All XYZ Corporation ("XYZ") vendors — domestic and foreign — are required to comply with this Code ("Code") with respect to the manufacture of any products sold to XYZ, whether manufactured by the vendor or by its subcontractors.
XYZ is concerned that the human rights of those who manufacture the goods it sells be respected. XYZ believes that this Code will improve the working conditions and quality of life of the workers whose labor produces those goods.
XYZ believes that adherence to this Code will create a positive response among its employees, customers and shareholders who are concerned about human rights issues.
XYZ requires that all merchandise it purchases be made in compliance with applicable federal, state and local laws, regulations, ordinances and administrative orders and rules of the United States and its territories to which XYZ is subject, and those of any foreign country in which merchandise that XYZ purchases is produced or delivered.
XYZ will deal only with vendors of merchandise which XYZ considers reputable, the production facilities and business and labor practices of which conform to the requirements of applicable law and the business practices of which conform to ethical norms that are consistent with those followed by XYZ. XYZ will not do business with vendors which violate the law, and will terminate vendors which do.
When XYZ learns that a vendor may not be conforming to an aspect of the Code, XYZ will promptly investigate. XYZ may then direct the vendor to comply, assist the vendor in complying or terminate its relationship with the vendor, as appropriate under the circumstances. If a vendor is terminated, any resumption of business will be conditioned upon XYZ's belief that the vendor intends in good faith to comply and the vendor having in place the monitoring programs necessary to ensure compliance with this Code.1
While XYZ recognizes that different cultural, legal and ethical systems exist in the countries from which it imports, XYZ believes that adherence to the following minimum standards is appropriate to all those vendors with which it does business.
XYZ will distribute a copy of this Code to all of its vendors and intends to monitor their compliance with it.
1. Civic Duties
XYZ will favor the use of vendors which contribute to the betterment of the communities in which they operate.
2. Safe and Healthy Working Conditions
Vendors must treat all workers with respect and dignity and provide them with a safe and healthy work environment.
Vendors must comply with all applicable laws and regulations of their respective countries regarding workplace safety and health.
Factories must have:
well lit and comfortable workstations;
sufficient lighting and ventilation with appropriat temperature control;
sufficient and well-maintained sanitary facilities with potable water, with no unreasonable restrictions on their use;
well-maintained machinery with appropriate operational safety devices;
sensible and legal storage, disposal and treatment of hazardous materials and conditions, with hazard warnings posted where appropriate;
multiple, clearly marked, unlocked exits on each floor of the facility for emergency evacuation;
halls and exits that are clear of obstruction to allow safe and rapid evacuation in case of emergency;
fire extinguishers, fire alarms and other appropriate and properly maintained fire protection devices;
directions for evacuation in case of fire or other emergencies posted in conspicuous locations throughout the facility;
emergency evacuation drills conducted at least every six months;
sufficient safety equipment and safety clothing for use by workers;
first aid equipment and supplies located at proper places throughout the factory; and
access to prompt medical care for employees in the event of workplace injuries.
3. Employment Practices
a. Child labor
Vendors may only employ workers who meet the minimum working age requirements under local law or who are at least 14 years of age, whichever is higher.
Vendors may not employ workers who are subject to the compulsory education requirements under local law, except consistent with laws that allow part-time employment of students.
Vendors are encouraged to develop workplace apprenticeship and educational programs for the development of workers, provided they are consistent with compulsory education requirements and the participants meet the above age requirement.
b. Disciplinary practices
Corporal punishment or other forms of coercion, whether mental or physical, are strictly forbidden.
c. Discrimination
Vendors must deal fairly with all employees and job applicants and may not discriminate on the basis of race, color, religion, sex, age, marital status, national origin, sexual orientation, disability or veteran status in the hiring, training, advancement, compensation, benefits, discipline and termination of workers.
Vendors must not deny their employees appropriate access to education, health care, or religious observance or unreasonably hinder employees' need to handle family emergencies.
d. Prison Labor/Forced Labor
Vendors and their representatives shall not sell to XYZ goods manufactured under duress, whether made by prisoners or be anyone else who is being forced to work by threats or intimidation.
e. Recordkeeping
Vendors must post in a prominent place in each factory location their personnel policies, written in a language understood by all their workers, which must disclose minimum working ages, wage scales, employee benefits, working hours, employee rights, safety rules, grievance procedures, disciplinary rules and include an anti-discrimination notice.
Vendors must make and retain personnel files on each employee reflecting proof of age, which must be in the form of a copy of a birth record, social security card, voting registration card, driver's license, passport or other official record of a government agency where these documents are available or other proof where such government documents are not available.
Vendors must make and retain files reflecting:
working hours and payroll records by employee;
local health and safety evaluations;
employee grievances and suggestions and employer responses;
the reasons for the imposition of disciplinary measures and
the reasons for termination of employees;
records of compliance with local laws and regulations, including reports of inspections conducted under the auspices of government agencies, where available to the factory.
Vendors must maintain records of all employment-related injuries and illnesses, specifying the medical treatment given or offered to employees in such cases.
f. Working Hours
Vendors must observe applicable laws regulating the number of hours that employees may work and must provide appropriate compensation for overtime.
Vendors should maintain a regularly scheduled workweek of no more than 60 hours.
Unless more is required by local laws, employees should be allowed at least one day off for each six days of work.
Vendors must comply with applicable laws that entitle employees to vacation time, maternity leave, sick leave and other mandatory leave periods and holidays.
g. Wages and Benefits
Wages must comply with local laws. Where prevailing wage levels in a particular area are higher than required by law, employees must be paid at the prevailing wage levels.
Vendors are expected to comply with all applicable laws and regulations regarding employee benefits, including those relating to insurance coverage and required retirement benefits.
XYZ encourages its vendors to provide wages that will allow their employees a decent standard of living.
XYZ favors the use of vendors which provide meaningful benefits to their employees.
h. Freedom of Association
It is XYZ's position that workers should have the right to open communication with management. Therefore, vendors must allow their employees the right to establish and join legal organizations of their own choosing without being penalized for their non-violent exercise of this right.
i. Employee Grievances
Employees must be allowed to raise with the vendor's representatives any job-related grievances they may have, without penalty or reprisal.
4. Environmental Compliance
XYZ requires its vendors to comply with all local laws protecting the environment and to conduct business so as to minimize waste and maximize recycling.
5. Ethics
Vendors must adhere to ethical standards that are consistent with those followed by XYZ. .
6. Legal
XYZ requires that all merchandise it purchases be made in compliance with applicable federal, state and local laws, regulations, ordinances and administrative orders and rules of the United States and any foreign country in which merchandise is produced or delivered.
7. Living Arrangements/Dormitories
Living accommodations, if provided by a vendor, must meet the following minimum criteria:
They must at all times be clean, healthy and habitable and must not be overcrowded.
Sleeping quarters must be segregated by gender, except where family members of different genders request to stay together and the vendor permits.
Workers must have their own individual beds or mats.
Facilities must have adequate lighting and ventilation, and heating and/or cooling as suitable for local climate conditions, with appropriate temperature control.
Workers must be given storage space for clothing and possessions.
Unless more is required by applicable law, there must be at least two clearly marked exits on each floor, and emergency lighting must be installed in halls, stairwells and above each exit.
Halls and exits are to be kept clear of obstruction to allow safe and rapid evacuation in case of emergency.
Directions for evacuation in case of fire or other emergencies must be posted in conspicuous locations throughout the facility.
Fire extinguishers must be accessible throughout the facility and fire alarm systems must be installed where appropriate given the size of the facility.
Hazardous and combustible materials used in the factory must not be stored in or near living quarters or in buildings connected with living quarters.
Emergency evacuation drills must be conducted at least every six months.
Residents must be free to come and go during their off-hours under reasonable limitations imposed for their safety and comfort.
Sufficient and well-maintained sanitary facilities, including baths and/or showers, must be provided in the facility and segregated by gender, and no unreasonable restrictions must be placed on their use.
Sufficient potable water must be available in the facility and no unreasonable restrictions must be placed on its use.
Vendors must prominently post a copy of this Code, translated into a language understood by their workers, in each factory.2
Vendors must make and keep current sufficiently detailed records to enable XYZ to determine their compliance with this Code, and make these records available to XYZ representatives upon request.
All charters, certificates of incorporation, by-laws, directors' resolutions or other constituent documents, as well as government licenses, permits, approvals, reports, evaluations and other government documents, must be made available to XYZ representatives upon request.
To report suspected violations of this Code, contact XYZ at [(local office telephone number)] or XYZ Headquarters at 1-800/___-____.
1. [Note: This language is included to encourage vendors to work with the company to achieve the positive and beneficial aims of the Code, and avoid the impression that the Code is only a punitive measure designed to eliminate vendors which fail to comply in any respect.]
2. [This provision could be modified to relate only to factories "in which goods are being produced for XYZ."]
These Implementation Procedures ("Procedures") are adopted for the purpose of implementing XYZ Corporation's Code of Conduct ("Code"), monitoring compliance with the Code and investigating possible violations of the Code.
To implement the Code, XYZ will:
A. Distribute a copy of the Code to all managers in its domestic and foreign buying organizations, including country managers, and to all new and existing vendors.
B. Train buying personnel and country managers to monitor compliance with the Code during factory visits.
C. Require vendors to execute an acknowledgment of receipt of the Code in the form of Exhibit 1 ("Acknowledgment").
D. Require the trading companies with which it contracts for goods to provide it with a list of the names and addresses of the manufacturers whose goods it will be purchasing. XYZ will attempt to obtain a list of the addresses of sites of forced labor to compare with these lists.
E. Require vendors to post prominently a copy of the Code, translated into a language understood by their workers, in each factory.1 The English version of the Code as written by XYZ will be the controlling version in the event of any discrepancy between English and foreign language versions.
F. Provide a copy of these Procedures to managers in XYZ's domestic and foreign buying organizations, including country managers.
To monitor compliance with the Code:
A. The Vice President of ________________, will ensure that all new vendors are provided with a copy of the Code and complete and return a signed Acknowledgment prior to XYZ's receipt of the first shipment of goods.
B. When a vendor is used for the first time, XYZ will have its buyers or independent parties inspect the manufacturing sites where goods will be produced for XYZ, prior to accepting the initial shipment of goods from the vendor.
C. Periodically, XYZ will inspect the factories of vendors, on either a scheduled or unannounced basis, to verify compliance with the Code.
1) Factory visits will generally be conducted by buying personnel or country managers or, in appropriate cases, by third parties;
2) A report must be completed during each factory inspection. The person conducting the factory visit will forward a copy of the report to the Legal Department and to the Vice President of _______________, or such person's designee ("Designated Reviewer");
3) If any violations of the Code are disclosed during a factory visit, a report in the form of Exhibit 2 must be completed and sent to the Legal Department;
4) If it is unclear whether or not a violation has occurred, the person conducting the factory visit must contact the Legal Department for further instructions (See Section III below).
D. Where there have been violations of the Code in the past by a particular vendor, the buyer and the Legal Department will jointly consider using an independent, third party to conduct unannounced visits.
E. Managers in XYZ's domestic and foreign buying organizations, including country managers, must be aware of and generally familiar with non-governmental organizations, local non-profit organizations and government agencies, the goals and activities of which involve fostering the same principles set forth in the Code. Such managers should contact XYZ's Vice President of ____________________in cases where they feel that consultation with and cooperation with any such organization may prove advantageous in implementing and monitoring compliance with the Code.
F. Country managers should keep abreast of current developments regarding human rights issues as well as local employment relations issues, in countries for which they are responsible. Country managers and buyers should be generally cognizant of these matters when they conduct factory visits.
XYZ may become aware of possible violations of the Code through factory visits by its buying office personnel, through news media reports, complaints of factory workers or private organizations or through other channels. When XYZ learns of an alleged violation, the following procedures will be followed:
A. The XYZ employee who learns of the alleged violation shall contact the Legal Department and give full cooperation. When the allegation arises from a factory visit, a report will be completed and forwarded to the Legal Department.
B. The buying organization, in conjunction with the Legal Department, will make a preliminary inquiry to determine whether the matter should be handled on the local level or whether a full investigation by the Legal Department is warranted.
C. If a determination is made that there is no need for a full investigation, then the buying organization will conduct an inquiry into the matter locally.
D. Local inquiries will be coordinated by the buying organization.
E. The following procedures will apply. To inform appropriate persons that a local inquiry has been commenced:
1) Public Affairs and the Ethics Officer must be notified of the allegation by the buying organization.
2) If deemed appropriate by the Designated Reviewer, the buying organization will contact the vendor involved in the allegation to advise that XYZ has begun an inquiry.
3) If deemed appropriate by the Designated Reviewer, the buying organization may also advise the complainant (if any) that XYZ has begun an inquiry.
F. The buying organization will take the following steps to investigate the allegation:
1) Determine if the company is a XYZ vendor;
(a) if the company does not appear to be a vendor, contact the party making the allegation and obtain more information (Is the company a subcontractor for a vendor? Does the company operate under another name?);
2) If the company is an XYZ vendor, identify all XYZ departments with which the vendor does business:
(a) ascertain the volume of business done during the last fiscal year and projected for the current fiscal year;
3) If the vendor fails to cooperate with the buying organization, notify the Vice President of __________________to follow up with the vendor and request cooperation;
4) Determine the vendor's history of complaints, if any, through the Legal Department database;
5) Attempt to determine whether similar complaints have been made against the vendor with respect to goods produced for other companies;
6) Where appropriate, and with the prior approval of the Legal Department, consult with local counsel retained by the Legal Department to assist in the inquiry;
7) Where appropriate and after consultation with the Legal Department, report legal violations to appropriate law enforcement authorities and cooperate in official investigations;
8) Where appropriate, solicit independent third party confirmation of the results of the investigation.
9) The buying organization may:
(a) contact any party believed to have relevant information, and request voluntary interviews (outside of the presence and preferably without the knowledge, of the vendor), with the assistance of translators, if needed;
(b) in the discretion of the buying organization, and at XYZ's expense, provide reasonable monetary compensation to factory workers/other persons as indemnity for loss of income during interviews, and meals and transportation expenses in connection with an interview; and
(c) where appropriate (and without guaranteeing the outcome), advise a factory worker being interviewed that XYZ will attempt to intervene with the factory manager in the event the manager attempts to retaliate against the worker for participating in the inquiry.
A. Upon completion of a local inquiry:
1) The buyer or his or her designee will send a report to the Legal Department in the form of Exhibit 2. The Legal Department will update its data base with the information in the report and forward a copy of the report to the Designated Reviewer.
2) The Designated Reviewer, in consultation with the Legal Department, will review the report and determine whether any further action is warranted, such as:
(a) advising the vendor of the violation with a warning that future non-compliance will endanger the vendor's relationship with XYZ; or
(b) conducting an appropriate follow-up visit(s) to determine whether violations have been corrected (this may be done by a senior manager, where advisable, to emphasize the seriousness of the situation); or
(c) taking steps to assist the vendor in complying; or
(d) restricting the amount of business done with the vendor; or
(e) terminating the vendor as to current and/or future business; or
(f) where appropriate and after consultation with the Legal Department, reporting legal violations to appropriate law enforcement authorities and cooperating in official investigations.
3) In appropriate cases, upon completion of a local inquiry and correction of any deficiencies discovered, the vendor may be required to recertify in writing to XYZ its compliance with the Code, by executing another copy of the Acknowledgment. In such cases, the acknowledgment may include an attachment specifying the steps taken and/or to be taken by the vendor to ensure future compliance and remediation of past non-compliance.
B. If, during the course of his or her inquiry, the buyer believes that a full investigation by the Legal Department is warranted, the buyer will terminate the inquiry, complete Exhibit 2 as fully as possible and forward it to the Legal Department with a recommendation for a full investigation.
If the Legal Department and the Designated Reviewer determine that a full investigation is warranted, the following procedures will apply:
A. The Legal Department will coordinate the investigation.
B. To inform appropriate persons that an investigation has been commenced:
1) Public Affairs and the Ethics Officer must be notified of the allegation.
2) If deemed appropriate by the Designated Reviewer, the Legal Department will contact the vendor involved in the allegation to advise that XYZ has begun a full investigation.
3) If deemed appropriate by the Designated Reviewer, the Legal Department may also advise the complainant (if any) that XYZ has begun a full investigation.
C. The Legal Department will take the following steps to investigate the allegation:
1) Determine if the company is an XYZ vendor;
(a) if the company does not appear to be a vendor, contact the party making the allegation and obtain more information (Is the company a subcontractor for a vendor? Does the company operate under another name?);
2) If the company is a XYZ vendor, identify all XYZ departments with which the vendor does business:
(a) ascertain the volume of business done during the last fiscal year and projected for the current fiscal year;
3) If the vendor fails to cooperate with the Legal Department, notify the Vice President_______________________ to follow up with the vendor and request cooperation;
4) Determine the vendor's history of complaints, if any, through the Legal Department database;
5) Attempt to determine whether similar complaints have been made against the vendor with respect to goods produced for other companies;
6) Where appropriate, hire local counsel to assist in the investigation;
7) Where appropriate, solicit independent third party confirmation of the results of the investigation.
D. In unusual cases:
1) The Legal Department may dispatch one or more XYZ attorneys to the location of the factory involved to conduct an on-site investigation;
2) The buying organization will cooperate with the XYZ attorney in conducting the investigation;
3) After consultation with Legal Department management, the XYZ attorney may:
(a) contact any party believed to have relevant information, and request voluntary interviews (outside of the presence and preferably without the knowledge, of the vendor), with the assistance of local counsel and/or translators, if needed;
(b) have such interviews transcribed or tape recorded, if deemed appropriate after consultation with Legal Department management, and the XYZ attorney has received the permission of the party being interviewed;
(c) in his or her discretion, and at XYZ expense, provide reasonable monetary compensation to local witnesses as indemnity for loss of income during an interview and meals and transportation expenses in connection with an interview;
(d) where appropriate (and without guaranteeing the outcome), advise a factory worker being interviewed that XYZ will attempt to intervene with the factory manager in the event the manager attempts to retaliate against the worker for participating in the investigation;
(e) render a full report of his or her findings to Legal Department management upon the completion of the on-site investigation.
Once a full investigation has been completed by the Legal Department:
A. The Legal Department will report to the Designated Reviewer and Public Affairs on the outcome of the investigation, and recommend to the Designated Reviewer appropriate action, if any, which may include:
1) Advising the vendor of the violation with a warning that future non-compliance will endanger the vendor's relationship with XYZ; or
2) Conducting an appropriate follow-up visit(s) to determine whether violations have been corrected (this may be done by a senior manager, where advisable to emphasize the seriousness of the situation); or
3) Taking steps to assist the vendor in complying; or
4) Restricting the amount of business done with the vendor; or
5) Terminating the vendor as to current and/or future business; or
6) Where appropriate, reporting legal violations to appropriate law enforcement authorities and cooperating in official investigations.
B. In appropriate cases, upon completion of a full investigation and correction of any deficiencies discovered, the vendor may be required to recertify in writing to XYZ its compliance with the Code, by executing another copy of the Acknowledgment. In such cases, the acknowledgment may include an attachment specifying the steps taken and/or to be taken by the vendor to ensure future compliance and remediation of past non-compliance.
C. The Legal Department will update its database with pertinent information uncovered in the investigation.
D. The Legal Department will recommend to the Designated Reviewer the proper handling of all goods allegedly shipped in violation of the Code.
E. The Designated Reviewer will review the report of the Legal Department's investigation and the Department's recommendations, and after consultation with the Vice President of ___________________, decide on and implement the appropriate response and advise the Legal Department of the actions taken.
F. On a quarterly basis (or more frequently, if advisable), the Vice President of _____________ shall advice the Chief Executive Officer and the Corporate Secretary of the results of all inquiries and investigations and all sanctions imposed against vendors. The Chief Executive Officer will ensure that the Board of Directors is periodically informed of these matters.
The Legal Department will maintain a data base of information uncovered in each inquiry/investigation, which will include at least the following information :
A. Names of all officers, directors, managers and attorneys of the factory involved in the inquiry, including married/maiden names and aliases;
B. Identification and location of all complainants;
C. Summary of allegation;
D. Pertinent information regarding any official complaint lodged with a government agency and the results of the agency's investigation, if available; and
E. Resolution of XYZ inquiry/investigation.
By the signature below of its authorized representative,
_______________________________________________________________________________________[name of vendor] hereby acknowledges receipt of a copy of XYZ Corporation's ("XYZ") Code of Conduct ("Code"), represents and warrants to XYZ that it is currently in compliance with the Code and covenants and agrees to be bound by and to comply with its terms. Each purchase order fulfilled and submitted to XYZ will be deemed to be a representation and warranty by the undersigned to XYZ that the undersigned is in compliance with the Code at the time the goods covered by the purchase order were manufactured and shipped to XYZ. The undersigned acknowledges and agrees that XYZ may report violations of the law by the undersigned to appropriate law enforcement authorities and that XYZ may cooperate in official investigations of the vendor.
____________________________________
(name of vendor)
By: ____________________________________
(name of authorized representative)
____________________________________
(title of authorized representative)
When signed, the original of this Acknowledgment must be returned to XYZ Corporation, _____________________________, U.S.A. [address] Attention: Vice President ____________________________.
This report is to be completed and forwarded to the Legal Department, to the attention of _____________________, upon the completion by a member of the buying organization of an inquiry into possible violation of XYZ Corporation's Code of Conduct ("Code"). This report may be submitted via regular mail, overnight courier, facsimile or E-Mail.
Information contained in this report will be used to 1) allow XYZ to review compliance with the Code by vendors around the world and 2) update the Legal Department database regarding Code violations.
I. Briefly summarize the allegation:
II. State how the allegation arose (e.g. factory visit, complaint by factory worker, news media, etc.), and identify the person(s) who made the allegation by name, title, organization, business and home addresses and business and home telephone and fax numbers:
III. Furnish the names of all officers, directors and managers of the factory involved in the inquiry, including married/maiden names and aliases. Include the name of the vendor's attorneys, if known:
IV. State whether any local government authority or official has investigated or is investigating the allegation. Where a written report of the investigation was issued by such authority/official and is publicly available, attach a copy.
V. Based upon your inquiry, do you believe the allegation to be substantiated? State your reasons why or why not. If not, skip to Section IX:
VI. If the allegation was substantiated, what action did you take as a result of your inquiry ? (e.g., warning to vendor to comply, agreement with vendor to change factory conditions):
VII. If the vendor agreed to change conditions in the factory which violate the Code, state the following:
| Condition | Changes to be made by Vendor | Dates on Which You Will Follow Up to Verify Changes |
VIII. If you are recommending that the Legal Department conduct a full investigation instead of resolving the inquiry at your level, state your reasons for the recommendation:
IX. State the follow-up steps you intend to take to monitor future compliance with the Code by this vendor:
X. Additional Comments? If the following space is insufficient, attach an additional sheet.
____________________________________
Signature
____________________________________
Name and title
___________________________________
Date
___________________________________
Telephone
___________________________________
Telecopier
__________________________________
E-mail address
1. [This provision could be limited to factories "in which goods are being produced for XYZ."]