by Jackson Lewis

In the areas of sexual harassment and discrimination prevention, employers have long recognized the need to implement policies and conduct training to educate and communicate core values to employees. In addition to fostering appropriate behavior, diversity, and efficiency in the workplace, these measures are vital to avoid or minimize liability in the event of a sexual harassment or discrimination lawsuit.

Similarly, with the passage of the Sarbanes-Oxley Act of 2002 ("SOX"), many organizations are increasingly aware of the legal and business benefits of developing corporate ethics compliance programs to address business conduct, financial reporting and accounting practices.

While SOX is largely intended to govern the conduct of publicly traded companies, its legal and practical effect is more far-reaching. In fact, the potential for criminal liability exists for anyone deemed in violation of certain portions of SOX. Because of its broad scope, all employers - large and small, for-profit and not for-profit, publicly and privately held - should be familiar with SOX's requirements.

Implementation of a Code of Ethics

SOX was enacted in the aftermath of corporate misconduct by large publicly held companies to protect shareholders, deter corporate fraud, and to prevent wrongdoing, including retaliation against whistleblowers. In general, entities covered under the most publicized aspects of SOX, such as financial reporting obligations, are issuers of securities under the Securities Exchange Act of 1934.

Section 406 of SOX requires covered entities to disclose whether they have adopted a "code of ethics" for senior financial officers, defined as written standards reasonably designed to deter wrongdoing and to promote:

1. Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
2. Full, fair, accurate, timely, and understandable disclosure in periodic reports required to be filed by the covered entity;
3. Compliance with applicable govern mental laws, rules and regulations;
4. Prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and
5. Accountability for adherence to the code.

Related to these standards, Section 301 requires covered entities to establish effective procedures for employees to report confidentially and anonymously their concerns regarding questionable accounting or auditing matters.

In addition to the requirements of SOX, companies trading on either the New York Stock Exchange or NASDAQ are subject to additional obligations. NYSE and NASDAQ regulations require listed companies to adopt a code of business conduct and ethics applicable to all directors, officers and employees, addressing, among other things, conflicts of interest, self-dealing, confidentiality, insider training, and reporting of illegal or unethical behavior.

Aspects of SOX Applicable to Every Organization

SOX provides for criminal penalties for altering documents, retaliating against informants and whistleblowers, and otherwise obstructing government proceedings and investigations into allegations of corporate fraud. These criminal sanction provisions are not limited to publicly traded companies, but rather apply to all organizations.

Even Section 806, which provides employees with broad whistleblower retaliation protection, can affect non-publicly traded companies and individuals as well. In particular, Section 806 provides in relevant part that no covered entity, or officer, employee, contractor, subcontractor, or agent of such covered entity, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee because the employee has engaged in a protected whistleblowing activity under SOX. Because these provisions potentially apply to all businesses and associated individuals, all employers should review their antiretaliation and document retention policies and practices.

Maintaining a Code of Ethics and Providing Training for all Employees

With the reach of SOX extending well beyond publicly traded companies and their employees and given the climate of close government scrutiny of corporate conduct, the adoption and maintenance of a code of ethics, as well as ethics training programs, should be embraced by all organizations. Such measures also make sound business sense.

Studies have shown a correlation between adoption of a code of ethics and training, and business success. A recent study revealed that companies emphasizing ethics as an important management strategy were twice as likely to be among the top financial performers as companies that did not.

Moreover, the existence of an effective compliance and ethics program has been identified in the amended federal criminal sentencing guidelines as a mitigating factor that could reduce the ultimate penalty to which an organization may be subject in the event of a criminal conviction. This is akin to having an effective anti-harassment policy as a defense that the company took real measures to prevent sexual harassment.

An organization's culpability under the federal criminal sentencing guidelines is generally determined by the company's:

1. Involvement in or tolerance of criminal activity;
2. Prior history of misconduct;
3. Violation of an order;
4. Obstruction of justice;
5. Maintenance of an effective compliance and ethics program; and
6. Self-reporting, cooperation, and acceptance of responsibility.

In conclusion, publicly traded companies that currently maintain a code of ethics should re-examine it to ensure compliance with the mandates of SOX and other applicable requirements, as well as the effectiveness of these efforts in deterring unethical or illegal conduct. Equally important is that such companies enforce these ethical mandates and conduct periodic training for all incumbent employees and new hires. Companies that have not yet enacted such a program should strongly consider doing so, even if not directly required to do so by SOX, NYSE, or NASDAQ.

The development of a corporate ethics compliance program is not a complete defense to criminal charges or to a civil action in the event of wrongdoing or improper conduct. In the end, there is no substitute for actual compliance with the law and ethical behavior by directors, officers and employees. However, such a program encourages appropriate behavior, promotes a culture of ethical conduct, and may serve to minimize criminal or civil liability. Jackson Lewis attorneys are available to assist employers in complying with the development of ethics compliance programs and training.