Financial Management Challenges and Ethics

financial leadership'

ETHICAL C O N D U C T

WHAT FINANCIAL EXECUTIVES Do To LEAD

BY FREDERICK MILITELLO AND MICHAEL SCHWALBERG

T oday's so-called "crisis" of accountability or financial integrity has been met with a flurry of laws and regulations

designed to restore public confidence in corporations. Likewise, many financial institutions and some corpo- rations seem to be trying to outdo one another in announcing new policies demonstrating their commitment to integrity and ethical behavior.

Yet, a new Executive Report by the Financial Executives Research Founda- tion finds that the vast majority of cor- porations and financial executives express strong beliefs that ethical behavior and financial integrity remain the rule of the day. Rather than believing that investor confidence can be restored by external regulation, they see the importance of "staying the course" and "walking the walk" as

both the ethical gatekeeper and con- science of their organizations.

In the study, Integrity-Based Finan- cial Leadership and Ethical Behavior: A Professional Response to Meeting the Challenges and Responsibilities, finan- cial executives from a wide range of companies openly share thoughts, insights and practices that relate to the "crisis" of financial integrity.

While the findings are vast, and at times controversial, two ideal por- traits of ethical behavior emerged; the "Ethically Intelligent Financial Execu- tive" (EIFE) and the "Ethically Intelli- gent Finance Organization" (EIFO).

The Ethically Intelligent Financial Executive He or she is aware of the multiple pressures that may potentially impinge upon the maintenance of

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one's integrity, and is further aware of the ubiquitous presence of ethical dilemmas faced by leaders in daily business life, and takes the time to reflect upon these dilemmas.

George Boyadjis, EVP, CFO and Treasurer of American TeleCare Inc., speaks for many in the study when he observes, "So much of what we do is driven by the creation of value through increasing the speed of busi- ness — shortening time to market, accelerating growth rates, cutting cycle times, etc. But, if we as financial executives are truly focused on value creation for the enterprise, then we must also reflect on the ethics and transparency of transactions and rela- tionships."

The EIFE is a valued business part- ner who actively assists the business- es in planning, development and

T w o IDEAL PORTRAITS OF ETHICAL BEHAVIOR EMERGED FROM A NEW

REPORT BY THE FINANCIAL EXECUTIVES RESEARCH FOUNDATION: THE

"ETHICALLY INTELLIGENT FINANCIAL EXECUTIVE" (EIFE) A N D THE "ETHICAL INTELLIGENT FirviANCE ORGANIZATION" ( E I F O ) .

www.fei.org January/February 2003 49

Arnold l-ldnish, Executive Director, Finance and Chief Accounting Officer, Eli Lilly and Co.

George Boyadjis, EVP, CFO and Treasurer, American TeleCare Inc,

Gary L. Ellis, VP, Corporate Controller and Treasurer,

Medtronic Inc.

implementation of projects and goals, and as the conscience of the organiza- tion, he or she at times must say "no." This executive also sets the tone at the top and leads by example.

A highly visible role model, thc EIFE uses every opportunity to articu- late and demonstrate high-integrity behavior to the finance organization and to the organization as a whole. This is the true meaning of integrity- based leadership.

Finally, the EIFE typically has received some training in the area of ethics. When playing a leadership role, he or she provides ample oppor- timities to others to experience ethical dilemmas through situational train- ing opportunities, bringing financial people together with busmess associ- ates from a wide spectrum of back- grounds.

Nick Cyprus, VP and Controller of AT&T Corp. notes, "In addition to standard controls, such as a code of conduct and good background checks, other controls could also be used. For example, financial people should be trained to identify and understand ethical/unethical behaviors and situa- tions. 1 like to get all my controllers and their key leaders together to do just that. We break into teams, where each team gets a different business sit- uation to deal with. They then have to come back to the broader group and discuss how they decided to resolve it.

"Basically, I give them the interest- ing situations 1 see on a day-to-day basis — not the headliners, but the stuff you really tend to confront all of the time. What's important is that the training gives them an opportunity, [so] that when they actually see that situation, they know what to do. You liave to set the right tone, and ethics training helps in that regard."

The Ethically Intelligent Finance Organization The authors suggest that there is an "ideal" finance organization for ethi- cal conduct. They found it quite extraordinary how much agreement existed among financial executives when it came to the "operationaliza- tion" of ethical conduct through the

structure and support mechanisms inherent in the structure of finance organizations.

The EIFO "walks the talk of integrity." Structurally, it strikes a bal- ance between centralization and decentralization. On the one hand, concentrating too much authority in a few hands may encourage the abuse of power. On the other hand, a clear functional chain of command, espe- cially with a strong finance organiza- tion at the top, can be an important source of support for those financial executives working closely with and/or reporting to operations.

Eli Lilly and Co.'s Executive Direc- tor, Finance and Chief Accounting Officer, Arnold Hanish, reiterated the importance of financial executives being accountable to, and having the support of, corporate finance: "Our operations management understand that their finance colleagues have a certain amount of latitude and some degree of judgment as it relates to interpreting accounting rules and financial matters, but ultimately must follow the rules and behave in an ethi- cal manner."

Given the plethora of rules and regulations in the pharmaceutical industry, they can certainly relate to the policies and practices within finance, maintains Hanish. If there are any questions or grey areas, the finance member of the operations team generally contacts corporate for advice and direction.

The EIEO embraces corporate codes of ethics and mission state- ments — formal training on such doc- uments are imperative. Most impor- tantly, EIFOs incorporate such codes of conduct into their financial deci- sion-making processes. Such rules of conduct are more than just compii- ance statements of behavior; they are action statements.

At Medtronic Inc., VP, Corporate Controller and Treasurer Gary L. Ellis says, "There are two reference points regarding ethics — the company mis- sion statement and its code of con- duct. When looking at any major transaction or acquisition, these two pillars become our guiding lights. If

50 FINANCIAL EXECUTIVE January/February 2003

PRESSURES ON ETHICAL CONDUCT

Why do good people do bad thlng5? Pressures on financial professionals might tempt them to stray from ethical behavior. Cognizance of the pressures can be an important preventive measure.

• Emphasis on Short-Term Results

Executives stressed as a criti- cal concern the importance of "making the numbers" in the short term. This can lead to a shortsighted approach to push the envelope on both the accounting and the business side.

• Sweat the Small Stuff Corporate misdeeds are often

the culmination of a series of small steps. These are not the notorious crimes that make headlines, but rather the rela- tively mundane issues faced on a daily basis. The first step may seem immaterial and unimpor- tant, but can set in motion a series of events leading to a major ethical breach.

• Economic Downturns Some executives felt that the

current ethical crisis is essentially a cyclical event — "a down mar- ket reveals what an up market conceals." Clearly, pressure to meet short-term results is exac- erbated in a cyclical downturn.

• Accounting Rules Accounting rules and the

transactions that they reflect have become increasingly com- plex and less intuitive — making it easier to abuse the rules or commit outright fraud. To com- pensate, many are moving toward greater disclosure — which does not always mean better understanding; it can cre- ate more confusion for "typical" shareholders.

we are uncomfortable with the management or the cul- ture of the target organiza- tion, relevant to our mission statement or code of con- duct, then we won't do the deal, no matter bow attrac- tive it may be."

Moreover, the research indicates that in EIFOs, rewarding integrity and integrity-based leadersiiip is critical. Tying performance appraisals to living a com- pany's values and demon- strated integrity is one way of doing that.

Some finance organiza- tions set their ethical tone at the bottom as well as the top, working with profes- sionals (internal or external) who assist tbem in selecting and orienting bigh-integrity new hires. Ethical profiling is becoming a common and expected practice. Several executives said their organi- zations bave hiring practices that attempt to select for qualities related to ethical behavior.

Tbe financial executives seem to agree that there should be no differ- ence between one's personal and business ethics. In today's atmos- phere, it is no longer acceptable to rationalize bad behavior by deferring to the notion that "business is busi- ness." A business model paradigm shift — perhaps driven by growing ethical awareness and social responsi- bility — is occurring. The executives in this study welcome a vision of business in wbich integrity is not something to be checked at the corpo- rate door, but is an integral part of life in and out of business, and a central aspect of all financial decision-making processes.

Medtronic's Ellis points out, "For the most part, being involved in the businesses is the right thing. 1 just don't see any negatives to a business partnering relationship. Where it migbt have gotten a little out of kilter is where the finance organization came up with the deals that saved the

/ RATHER THAN

BELIEVING THAT INVESTOR

CONFIDENCE CAN

BE RESTORED BY EXTERNAL

REGULATION. THE

EXECUTIVES SEE THE

IMPORTANCE OF "STAYING

THE COURSE" AND "WALKING

THE WALK" AS THEIR

ORGANIZATIONS' ETHICAL

GATEKEEPER AND y

CONSCIENCE. _ ' .

quarter. If you look at the companies that got in trouble, the 'deal-makers' — the ones that were really coming up with the "fiavor of the month ideas" — were not assisting the busi- nesses, but in almost all cases, were creating a completely different busi- ness. This is not business partnering."

Ellis asserts that the last thing financial executives should do is climb back into their financial silos. "We will be much more successftil as a profession in bringing back corpo- rate America by being good business partners, but doing so with integrity."

Fred Militello Jr. is a Senior Partner with FinQuest Partners LLC, a Wall Street- based financial consultancy practice, and adjunct professor of finance and interna- tional business at New York University's Leonard N. Stern School of Business. Dr. Michael Schwalbert is associated with Hudson Vailey Psychology Associates PLC. The complete study can be pur- chased from the Financial Executives Research Foundation at: www.fei.org/ rfbookstore, or 973.765.1033.

vwvw.fef.org January/February 2003 51

BFST OF THF BFST: PROPFRTY MANARFRS

Managers Face Low rental rates are forcing property management firms to take steps to protect their buildings' income.

A s property management firms try to retain tenants, declining commercial real estate values and

disappointing rental rates are compelling them to find creative approaches to maxi- mize their clients' net operating income. For property managers, this means a fundamental change.

"Property managers have to think like asset managers," says Barry Katz, a senior managing director with CB Richard Ellis (CBRE). "Property managers used to think, 'How can a property be serviced, how cari lower expenses be achieved, and how can tenants be more comfortable?'"

Some of the steps the managers are taking include trimming staff levels, and negotiating discounts with vendors for services such as elevator repair, mainte- nance of the property grounds, and utility installation. As buildings lost tenants dur- ing the economic downturn, operational staff was cut at properties across the coun- try, including janitorial, secretarial and maintenance workers.

Because many property management firms are servicing tenants with a small- er staff than when their agreement was originated, Katz says the firms should be able to obtain discounts fi'om provid- ers, whether janitorial or other servicers. "Many times that's left on the table or not aggressively sought after," says Katz.

On the operating expense side, the main savings comes from analyzing ser- vice levels and bulk purchasing, says Katz.

Firms that manage vast amounts of square footage nationally can offer packaged pricing and servicing levels fi-om their vendors across the board fi'om property taxes to insurance to utilities to repairs and maintenance, which helps protect an owner's net operating income.

As staffs have been cut due to bud- getary limitations, property manage- ment firms have been re-training their employees. "Training is as important now as it has ever been," says Dan Pufunt, head of property management with Chicago-based Jones Lang LaSalle (JLL). JLL trains its staff in the financial skills and risk management aspects of property management.

"Clients want property managers to be diligent relative to capital planning," states Pufunt. That can include the delicate bal- ance of renewing tenants while minimiz- ing a buuding's improvement dollars.

Meanwhile, CBRE trains its employees to seek concessions that might not be permitted under the lease agreement that can be made to improve the long-term relationship with a tenant. That show of goodwill can convince a tenant to renew its lease at its current property.

Holistic marketing while they still adhere to servicing basics, Katz adds that it's also important for property managers to understand how a building reacts to the local and national commercial real estate market. The aim

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is to make sure that a building is branded and marketed to compete for choice ten- ants.

The managers need to understand tenants' concerns. "Tenant brokers are asking, 'What's the strategy of the owner, what's the long-term view?'" says Katz. Is the building going to be leased up and flipped? Will the building be maintained? Will the owner make sure that the ten- ants are comfortable, both physically and financially, in the building during the next three to five years?

Property managers have to be holistic in their approach, says Katz, by protecting their clients' financial interests.

And while property management firms are focusing on the basics to attract and retain tenants, the firms are also edu- cating their employees, including technol- ogy and marketing managers, to be aware of future trends in the industry. What will the next generation of occupants be look- ing for? How will they use space?

"Ten years ago, we would've never realized that energy and sustainability services would be a hot topic today," says Pufunt. Taking a page from that book, JLL demands its property managers be for- ward thinking on behalf of its clients.

"It would be shortsighted to expect tenants to use space exactly the same way as they did 10 years ago," adds Pufunt. And with different communication avenues like Facebook, Twitter and other forms of social media, a new type of workforce

is coming into the market that has developed a new way of communicating with each other in their daily lives. Pufunt believes these new communication avenues wül translate into the workplace, and that property managers have to be ready. —Daniel Beaird I

www.nreionline.com

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