Being a ‘good guy’ is not enough to keep your company compliant

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In 2001, Vincent Calarco was riding high. His hard work and business savvy had put him atop Crompton Corporation — a multinational specialty chemical manufacturing company with nearly $4 billion in annual sales. Just one year later, his Connecticut home and Crompton’s corporate offices in New York and London were raided by law enforcement officers investigating allegations of antitrust violations. This was the beginning of the end of what, until that point, had been a very successful career.

Like many CEOs, Calarco was a brilliant, hardworking business man. He had an undergraduate degree in chemical engineering and held an MBA with distinction from the Harvard Business School. After leaving school, he worked his way up the corporate ladder to become the president of Uniroyal Chemical Corporation in 1979. He served in that position until Uniroyal sold the business to Avery Inc. in 1986 but managed to retain the top spot following the divestiture.

In 1996, Calarco became the president and CEO of Crompton & Knowles following its acquisition of Uniroyal Chemical. Continuing to grow his company by acquisition, Calarco oversaw a merger with Witco Corporation three years later, which created the Crompton Corporation, where he served as CEO and president.

As later investigations revealed, while Calarco was working to grow his company, unbeknownst to him, there was a malignancy festering in the rubber chemical business he had led for over two decades. For many years, senior Uniroyal employees in the rubber chemical business participated in a cartel comprising several chemical companies to fix rubber chemical prices in violation of antitrust laws in the United States, Canada, Japan, and the European Union.

Criminal indictments were handed down to two of Crompton’s senior executives involved in the scheme. Crompton ultimately paid millions in attorneys’ fees and tens of millions more in fines and lawsuit settlements. And, although he was not involved in any criminal activity, the Crompton board forced Calarco to leave the company, bringing an ignominious end to a distinguished career.

Tragically, Calarco’s fall from grace is not unique. Every year, thousands of bright, talented, honest business executives are sidelined with shattered reputations and unused potential because of their colleagues’ or agents’ misconduct. Like Calarco, they were not punished for engaging in misconduct themselves. Instead, they were held accountable for their failure to prevent colleagues from engaging in corrupt business practices. As Calarco and many others have learned, just “being a good guy” does not get the job done. To avoid their fate, you must implement sound internal controls, exhibit strong ethical leadership, and periodically measure your firm’s ethical culture strength.

Sound internal controls

As the term is used here, internal controls comprise policies, procedures, codes of conduct, training programs, monitoring, auditing, 24/7 company hotlines, data privacy protocols, cyber security protections and other similar compliance management system elements that enable compliance. Because such compliance management systems are either mandated by law or perceived to be a business necessity, most firms have invested in such systems to one degree or another. However, in my experience, CEO confidence in the reliability of their company’s compliance management systems is often misplaced.

I have conducted risk assessments and systems evaluations of the compliance management systems of nearly a dozen corporate functions and multinational corporations. In every instance, without exception, these evaluations identified profound control vulnerabilities and significant opportunities for improvement.

Internal controls are like insurance — they cost money but provide no short-term return on investment. Consequently, most corporate functions operate on lean budgets and do the best they can with their limited resources to keep their fingers in the dike to avert catastrophe. If you have not had an independent evaluation of your internal controls at your firm, I recommend getting one done sooner rather than later so you can have the confidence that they are operating within your risk tolerance.

But, as vital as they are, sound internal controls alone are insufficient to guarantee compliance over the long term. Your people don’t follow policies and procedures. They follow leaders.

Strong ethical leadership

Leading any company — let alone a large multinational — is incredibly challenging work. CEOs must be on top of every aspect of their business and are often working on information overload. So, it is easy and quite natural for CEOs to become consumed with the work necessary to manage the company’s financial performance, personnel issues, product or service delivery, customer satisfaction, supply chain challenges, research and development programs, shareholder concerns, reports to the board of directors, mergers and acquisitions, salesforce performance and myriad other business-critical subject matter leaving little gas left in the tank to build and sustain a strong ethical culture. This is the tragic error that Mr. Calarco made. He, like many others who have departed their companies in disgrace, failed to recognize that strong ethical corporate cultures do not emerge spontaneously; they must be built from the top down.

As organization psychologists have observed for decades, and as experience has taught us, when employees are pressured to perform, they are tempted to cheat to meet expectations. The greater the pressure, the greater the temptation to cheat. Strong ethical leadership from the top, not internal controls, is the single most potent countermeasure to ensure employees play by the rules. CEOs must actively make it clear in both word and deed to everyone in their organization that they must always act with integrity and comply with the law and company standards of conduct. Importantly, this work cannot be outsourced to the human resources or compliance department. The top dog has to set the standards and enforce them consistently with the object of building and sustaining a strong ethical culture.

Measuring ethical culture strength

Decades of research by the Ethics Resource Center (“ERC”) has confirmed that the single most important factor driving ethical corporate conduct is “ethical culture strength.” We are social creatures. If we work in a corporate culture that encourages and rewards ethical conduct — even if it costs the firm business opportunities in the short run — we will conform to that ethos. And of course, the contrary is true. The only way to determine your firm’s ethical culture strength is to measure it. Fortunately, the ERC and several other firms have developed commercial tools that can do just that and benchmark your company’s ethical culture strength against your peers. This data is essential to helping you confirm whether your efforts to build a strong ethical culture are succeeding.

Had Mr. Calarco and other successful business professionals whose careers ended in disgrace taken the three steps outlined above, they likely would have averted their fate. Act now to ensure you don’t join their ranks.

Jim Nortz is founder & president of Axiom Compliance & Ethics Solutions. He serves on the Conscious Capitalism Rochester Board of Directors, is a member of the International Association of Independent Corporate Monitors and is a National Association of Corporate Directors Fellow. Jim also is a former Board member of the Rochester Area Business Ethics Foundation (“RABEF”) and the Ethics and Compliance Officer Association (“ECOA”). Nortz can be reached at [email protected].