Last year, the Securities and Exchange Commission mandated that CEOs and CFOs of the U.S.'s largest public companies certify their financial statements were accurate. The effort was one of many, designed to expose unethical practices, curb accounting fraud and restore investor confidence. While this exercise did uproot a few CEOs who refused to confirm earnings, it also confirmed that there are many companies who take their fiscal and ethical responsibility seriously.

 

“For the good companies, its very much business as usual,” says Carol Tomé, the CFO for The Home Depot. Tomé and Ira Sallen, senior vice president of Human Resources for Bertelsmann Music Group, recently spoke on ethics and corporate governance at the Undergraduate Business School Leadership Conference at Emory University’s Goizueta Business School.  Students from 19 of the top business schools gathered to explore ethics as it relates to business leadership. The event was sponsored by The Home Depot.  

 

Keynote speaker Tomé stressed that corporations need to establish and enforce core values in all employees, at all levels.  According to Tomé, the company has long prescribed to a detailed written code, leaving little room for miscommunication. 

 

 “We have eight core values,” she says. “Things like taking care of our people, excellent customer service, giving back, entrepreneurial spirit, and doing the right thing. These values define us and our corporate ethics.”

 

The values are part of Home Depot’s business strategy, says Tomé. “They give us a stake in the ground. They serve as a stabilizer and yes, as a shield. When challenged with a difficult situation, we look to our values, and take the high road.”

 

Policies Rule

 

Supporting those values takes an active board of directors. Being on the Home Depot Board requires more than attending meetings, Tomé continues. For instance, the company’s audit committee meets five times a year, with four additional telephone meetings. “[Board members] are very engaged, not only in financial aspects and internal controls of our company, but also in our business. Our board is required to spend time in our stores. They are required to be in our stores every quarter, and report out what they see. From our perspective,” Tomé explains, “this is the right kind of governance that we need from our board. Not running a business, but giving good oversight and engagement, asking the hard questions.”

 

Company policy leaves little room for ethical dilemmas surrounding legal, regulatory, and financial issues. “We have a compliance counsel, consisting of the executive vice presidents of the company, and we have compliance policies that we have enacted for every aspect of the laws that we must comply with:  Be it advertising, antitrust and environment, the foreign corrupt practices act, labor employment and political activity, or safety and securities, we have policies that deal with that. And then we review how we’re doing relative to those policies. We get together once a quarter, and we talk about it. And where we have opportunities for improvement, we put together an action plan to address it.

 

“It is a very important aspect of our culture, and it is one that allowed us to have no angst, no concern at all when we were forced and required to sign our financial certificates, because we knew we were in compliance.”

 

Facing Challenges

 

Home Depot leaders believe these firm values and culture will see the company through its current challenges. CEO Robert L. Nardelli joined Home Depot in 2001, placing the company in a transition period after 22 years with founding leaders Arthur Blank and Bernie Marcus. “If we’re going to take our company from $50 billion to $100 billion, we’ve got to make some changes,” says Tomé. “So we made changes like centralized merchandizing, bringing in a new operating model in our stores, extending payment terms to generate a lot of cash to keep our financial flexibility, and in 2002, we felt the pain of a lot of those transitions.

 

“We started to look at our store mix,” she continues, “and realized that our store base was aging, so we began a remodeling program. We underestimated what that would do to stores, and what the impact would be on our company. We’ve had a tough year, but are doing the right things for the future of our company.”

 

The company’s sales growth was 9% in 2002, the lowest growth in its history. Investors are nervous, and that is reflected in Home Depot’s current stock prices. But Tomé isn’t worried.

 

“Where we’re going is really exciting, because we’re doing all the right things for our company to allow us to deliver predictable and sustainable growth. At the end and beginning are our values—the one thing that will never change in our company.”

 

A Changing Market

 

Bertelsmann Music Group (BMG) has its own set of challenges, but unlike Home Depot, the company has only recently established a set of core values. The Internet struck a severe blow to music industry profits, and company leadership decided the time was right for all employees and operations to get on the same track.

 

Bertelsmann may not be a household name, but the 170-year-old company is a fixture in many households. What began as a German Bible printer has grown into one of the largest privately owned multimedia companies in the world, with $18 billion in revenue. Some names you will recognize: Random House, largest printer of books in the world; RTL, the largest television network in Europe; BMG Music Service; magazines YM and Fast Company. If none of those sound familiar, think the American Idol television program, Pink, Avril Lavigne, Whitney Houston, Christina Aguilera, N’Sync, Backstreet Boys, R Kelly, Carlos Santana, Alicia Keys, Rod Stewart, Dido, Brittany Spears, Dave Matthews, Alan Jackson. These performers, and many others, are signed with BMG. The company distributes 200 record labels in 41 countries, and it received 71 Grammy nominations in 2003 alone.

 

Thanks to the advent of compact discs, the period from 1989 to 1995 was the music industry’s highest growth period ever, says Ira Sallen, senior vice president of Human Resources for BMG. This was not a reflection of the current talent; it was also because several generations of music lovers were replacing their cherished vinyl recordings for the smaller, more durable CD. “Record companies were making a fortune,” says Sallen. “The margin at the time was about $5 a CD. It was like printing money—we were growing at anywhere from 18% to 25% globally each year. But around 1995 or 1996, it began to slow down as the conversion from CD to vinyl began to wane and the Internet began to take hold.”

 

Napster and similar services receive a share of the blame, and Internet file sharing and CD burners also contribute. “In the past two years, purchased recorded music is down 14%,” Sallen adds. “Next year it is going to be another 4% to 5%.” As a result, the industry has done some deep thinking. BMG decided it needed to explore an alternative business model and to reduce its total cost structure. Ultimately, the company cut $200 million in costs globally, including laying off almost 2,000 employees worldwide and eliminating the regional office structure.

 

“We felt like we also needed to change the culture at BMG,” Sallen continues. “So we set out to develop a set of core values. There was an inherent value system which had evolved over the years, but we just never took the time to articulate it.” After committing itself to these ideals, BMG executives went on their own world tour, sharing the new message with employees everywhere it does business.

 

First on the list, BMG determined that the music industry, and its employees, needed to face reality. “The music business isn’t this perk laden, money-driven business any more,” explains Sallen, who peppered his talk with entertaining celebrity anecdotes. “The private planes and $5,000-a-night suites, and the $100 million artist contracts—all that had to go away. The business just can’t afford those luxuries anymore if it hopes to survive.” Sallen cited the example of superstar acts, who may have huge cult following and can fill a stadium in minutes, reminiscent of the Grateful Dead and other similar bands. “But their albums just don’t sell as well as you would expect any longer. These acts can still easily sell 2 to 3 million [CDs] a year, but you guys end up downloading the rest and thereby reducing the income to the artist as well as the companies while breaking various copyright laws. It’s not in our best interest [to award huge contracts] any longer as the economics just don’t work.”

 

BMG is also focusing on leadership and team spirit, “from the lowest organizational level on up,” says Sallen. Despite its reputation, the music business requires hard work and commitment. He says employees are hearing that they need to “make a decision, take responsibility for what you do and work as a team. We all depend on one another for success.”

 

At the same time, without a passion for the music, one will just not survive at BMG. If you’re in this type of creative business, you have to have an absolute, unbridled passion for it,” Sallen continues. “The music business and all creative businesses for that matter are frenetic, crazy environments.  We are in the business of selling emotion and people who work in the industry have to embody the same type of passion.  It can be extremely exciting and a lot of fun, but it is also very demanding.  When crossing over from another industry, the adjustment can sometimes be a bit disconcerting.  It is the type of business that gets under your skin.  Either you remain in it for life or you become frustrated by the uncertain nature of the environment and wash out within months.  There is no middle ground.”

 

Facing reality, leadership, passion and team spirit are the hallmark of BMG’s new vision. In a global corporation, acting on these values takes commitment. “We are making sure that each person is responsible for the consequences of his or her choices or actions. This translates well in the United States, but you take this to some of the other countries and I’ll readily admit that there are some fairly unorthodox business practices which aren’t what we would like to see,” says Sallen. “Unfortunately, it is a way of doing business in some territories.  We have now put a stake in the ground and have adopted a policy of “zero tolerance” for these types of business practices.”