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It's Not Just Compliance, But Ethics and Values That Count

In a new era for independent directors, Dawn-Marie Driscoll, already a busy woman, is likely to be even more in demand. She is president of Driscoll Associates, a Cape Coral, Fla.-based business ethics consulting firm, and executive fellow and advisory board member at the Center for Business Ethics at Bentley College in Waltham, Mass. In addition, she serves as an independent trustee and board chairman for the mutual funds at Scudder Investments and serves on the board of governors of the Investment Company Institute. She has also been a member of the ICI directors' services committee since its 1995 formation and served as its chairman from 1998 to 2002.

This past May, Driscoll became chairman of the nominating and corporate governance committee of the newly created Independent Directors Council of the ICI, which, among other things, seeks to enhance funds directors' participation in public policy initiatives.

Money Management Executive Editor-at-Large Lori Pizzani recently spoke with Driscoll, who is a big proponent of fostering ethics and values within companies of all industries, including the investment management industry. An edited version of their discussion follows.

MME: Have we seen a dearth of ethics in the investment management industry, as evidenced by the current mutual fund industry scandal?

Driscoll: At the recent ICI General Membership Meeting, I was asked a similar question: "Do these scandals prove that people on the lower and middle levels of firms are ethical, but that senior executives aren't ethical or simply don't have any ethics?"

This is, of course, untrue. When you read about misdeeds in an organization, it is easy for people to assume that others are unethical. But that often confuses individual ethics with organizational ethics or business ethics. The shorthand version of this myth is that if we only hired ethical people, we wouldn't have any problems. And if we have problems, that means that we have unethical people. But that is untrue.

By focusing on business ethics, we try to strengthen the ethical infrastructure in an organization, to have the kind of built-in support so that when fundamentally good and ethical people are confronted with a dilemma, they have some guidance as to what the company would like them to do. That is often not just a choice between black and white or right or wrong, but an evaluation of two rights, or two grays.

MME: We heard you speak at the ICI about ethics officers, company-wide ethics committees and even advice lines. What other things can companies of all industries do to foster an ethical culture?

Driscoll: Other industries and companies have done a very sophisticated job of strengthening their ethical infrastructure, and here I want to emphasize ethics, as opposed to compliance. I think one of the dangers, particularly coming out of a period of misdeeds or scandals, is that we will hang our hat on compliance and say, "Well, if we only strengthen our compliance, everything will be fine." In fact, that isn't necessarily the case. Compliance is the floor, and ethics is the ceiling. My colleague and I have written a book called Ethics Matters: How to Implement Values-Driven Management, and in the book we recommend several things to make sure that the ethics side of your efforts is as strong as compliance.

The first thing companies should do is undertake a self-assessment. That should go beyond just looking at the 40 Act or applicable laws and regulations for the investment management business. They should go further and ask, "What are our risk areas that may not be contemplated by statutes or regulations, but that we know could cause problems?"

An example of this might be where you have a senior executive or a portfolio manager sitting on a public company's board, and your funds hold that company, or perhaps are the largest holders of that company. This could obviously be a source of problems.

But you must do a risk assessment in other areas as well. You need to ask, "What do our performance appraisals say? What are the factors we use to evaluate people?" If you're evaluating people on long-term performance for shareholders, you might get one set of behaviors. But if you are evaluating people on short-term gathering of assets, for example, you are going to get another set of behaviors.

MME: What comes next?

Driscoll: You need a genuine commitment from the top, including the board of directors. Enron had impressive values on paper, but the people at the top apparently behaved in a different way, motivated by stock price.