Role of CFO in Ethical Culture of an Organization
A conversation between Jeff Kuhn, managing partner of FLG Partners, specializing in CFO consulting services, and Kirk O. Hanson, executive director of the Markkula Center for Applied Ethics, on the impact of the chief financial officer on a company's ethics.
The finance operation in a corporation is uniquely qualified to take a leadership role in embedding ethics through the organization because finance is plugged into virtually all facets of a business, said John Batty, formerly CFO of Affymetrix, at the July meeting of the Center's Business and Organizational Ethics Partnership. "Finance professionals can become ethics ambassadors throughout the company," he said.
Batty was one of four CFOs on a panel moderated by Jeff Kuhn, managing partner of FLG Partners, specializing in CFO consulting services.
Building on Batty's theme, George de Urioste suggested that CFOs can take a "higher order perspective" on ethics, advocating for it "not just because we have to but because we want to." De Urioste was CFO at Marvell Semiconductor. Ethics, he said, offers many advantages to an organization, fostering trust, goodwill, employee retention, and reputation.
Reputation, said Brad Buss, CFO at Cypress Semiconductor, is ultimately the most important thing a CFO can have. "Once it's tarnished," he warned, "you're unemployable." He recommended that CFOs have a clear understanding of this with their CEOs when they take the job. Recalling such a conversation, he said, "I told the CEO, I will think of the shareholder first, the board second, and the CEO last. If you want a CEO lapdog, I can name some other guys, but that's not me."
Panelists all had had experiences when their duties to maintain the transparently and integrity of "the numbers" came in conflict with what their CEOs wanted to "report". As standard bearers for ethics in the organization, they all said there were times they had to stand up to their CEO and in some instances threaten resignation or escalation to the Board.
"The first people employees look to are the CEO and CFO to see if they have a real commitment to ethics," said Ronald Pasek, CFO at Altera. Whatever they say, if they behave unethically, employees are likely to do so as well.
The panelists had several practical suggestions for infusing ethics into the organization. Several favored representation letters, in which managers sign a written confirmation that that the financial statements they are making are accurate. Pasek advocated requiring these letters at all levels of the organization where management judgment is exercised. The letters, Pasek explained, make managers think carefully and often initiate fruitful discussions about gray areas in financial reporting. They also, said de Urioste, are "a detection mechanism." If the Board Audit Committee checks and they only have 98 percent of the rep letters, that may indicate a problem with the other 2 percent.
They all emphasized the importance of face-to-face encounters with employees, including financial/compliance boot camps and "skip-level" meetings where they made themselves available to employees at various levels in the organization. "The people who know what's happening in a company may be in the middle or at the bottom of the organization," Batty said. "CFOs can help figure out how to get information to flow up and down the organization."
Whenever a transgression takes place, the panelists agreed the event should be discussed at multiple levels within the organization. There should be no doubt that a rule or trust has been broken and that timely and definitive action has been taken.
Miriam Schulman is the communications director of the Markkula Center for Applied Ethics.
Aug 1, 2011
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