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.

You also need a very clear code of ethics. My quarrel with some organizations is that their code of ethics looks like, and probably was, written by lawyers. The best codes are very user-friendly, and they include examples and questions and answers, and are really not written from the top down. The best codes start by asking employees what questions they have, what situations they've encountered, and what they often question.

MME: Once codes of ethics are established, then what?

Driscoll: The next step is ongoing communication. You can't just throw the code out at people once a year and say, "Sign it, and let's call it a day." Companies that have good programs frequently have senior executives communicating with their people through Web sites, by answering weekly Q&As received from employees, and by telling stories about misdeeds or incidents.

After that comes training--ethics training, not compliance training. A lot of companies have sophisticated programs they have developed in-house. At the Center for Business Ethics where I am affiliated, we help companies train their people. The National Ethics Officers Association has more than 1,000 members who share programs with each other.

There's also a well-known company called LRN (see www.LRN.com) that provides training modules customized to a company and its industry. They have modules on business ethics, covering such topics as understanding your company's code of ethics, how to make an ethical decision, what is a conflict of interest and so on.

MME: Is that type of ethics training just for middle managers and below?

Driscoll: Not at all. This is for everyone, from the CEO and board, all the way down.

Next, you need resources for people to access. This is an area where I hope we can all do a better job. Our Scudder Funds now have a dedicated post-office box in Florida so that investors, employees or anyone can contact our board. But the more important resources are really in-house.

MME: Do you mean like the whistleblower hot lines that have popped up at some companies?

Driscoll: You are really talking about two different things. First, part of the new legislation for audit committees is that they must provide whistleblowers access to the committee. We counsel companies to use as broad language as possible when establishing such a procedure so that we don't put the burden on employees to figure out whether their question involves possible illegal acts or financial matters.

Also, we recommend ideally that access to a whistleblower resource should not be through the company, but rather through an outside source or outside company.

Another resource that is important is providing a place where employees can go to challenge or question something. There should be a well-defined procedure to follow, not just a suggestion to tell or ask your supervisor.

Some companies have very specific directives on when and how to challenge, and they expect employees to step forward. Here, resources can include an ethics office, a Web site or an internal help line.

MME: What do you say to those companies who say that they are working on such reduced profits right now, that they don't have the money or resources to devote to this?

Driscoll: It doesn't take much money, or resources. By contrast, just look at what some of the companies are paying in fines and penalties.

It's a question of commitment. With some of the industry's scandals we've seen, had there been an effective company-wide ethics committee in place, comprised of people from human resources, legal, the trading desk, sales, compliance and others, troublesome issues might have been addressed and resolved.

MME: Must the entire organization get behind an ethics initiative?

Driscoll: Yes, there must be organizational ownership so that all parts of the organization buy in. You can't have an ethics initiative that either the "superstars" think doesn't apply to them, or where a segment of employees feel exempt. And you have to have consistent standards and enforcement. If you're not willing to fire your superstar for an ethics violation, then your program has no meaning. Everyone will know that the initiative is false.

MME: What other steps can be taken?

Driscoll: Companies need to audit and evaluate their programs to see where breakdowns occurred, and then continue to revise and reform programs. People are human, but the goal is to prevent as much as you can and to detect it and cure it when it happens.

MME: Is there anything that mutual fund boards can do to enhance the ethical culture of the investment advisor?

Driscoll: Absolutely. I think boards can be very effective by just asking questions about the firm's ethics initiatives and whether it uses benchmarks, not just against other asset management firms, but against all types of companies that have good programs. The board should also ask the advisor if it stresses fiduciary responsibility and ethics. Who was the last outstanding employee that the firm reluctantly fired for ethics violations, and, did he/she slip out in the dead of night, or did you use that situation as a teaching tool for the rest of the organization?

The goal is to have such ethics and values so ingrained in an organization that the culture remains intact no matter who is in charge.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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