The Federal Sentencing Guidelines Ferrell for Organizations: A

The Federal Sentencing Guidelinesfor Organizations: A Frameworkfor Ethical Compliance

O. C. FerrellDebbie Thome LeClair

Linda Ferrell

ABSTBJ^.CT. After years of debate over the impor-tance of ethical conduct in organizations, the federalgovernment has decided to institutionalize ethics asa buffer to prevent legal violations in organizations.The key requirements of the Federal SentencingGuidelines (FSG) are outhned, and suggested actionsmanagers should adopt to improve ethical comphance

O. C. Ferrell is Distinguished Professor of Marketing andBusiness Ethics in the Fogelman College of Businessand Economics at The University of Memphis. He waschairman of the American Marketing Association EthicsCommittee that developed the current AMA Code ofEthics. He has published articles on business ethics inthe Journal of Marketing, Journal of MarketingResearch, Journal of Business Research, Journal ofMacromarketing, Human Relations, Journal ofBusiness Ethics, as well as others. He has co-authoredten textbooks including Business Ethics: EthicalDecision Making and Cases, Third Edition, and atradebook. In Pursuit of Ethics.

Debbie Thome LeClair is an Assistant Professor ofMarketing in the College of Business at The Universityof Tampa and Director of the Center for Ethics. Shereceived a Ph.D. in Business Administration from TheUniversity of Memphis. Her research interests includebusiness ethics, cultural issues in organizations and socialnetwork analysis. She has published articles on businessethics in the Journal of Business Ethics, the Journalof Public Pohcy in Marketing, the Journal ofTeaching in International Business, and numerousconference proceedings.

Linda Ferrell is an Assistant Professor of Management ofThe University of Tampa. She received Ph.D. inBusiness Administration from the University ofMemphis. Her areas of research include corporate socialresponsibility, determinants of CEO compensation, orga-nizatioal justice, and ethics training. She has publishedan ethics case for NACRA, in the Case ResearchJournal, in the Journal of Public Policy inMarketing, and in numerous conference proceedings.

are presented. An effective compliance program ismore a process and commitment than a specific blue-print for conduct. The organization has the respon-sibihty to create an organizational climate to reducemisconduct. The adoption of a FSG complianceprogram has the potential to substantially lessenorganizational penalties if there is due diligence toprevent misconduct. Federal courts determine theeffectiveness of an FSG program after a violation

occurs.

Ethical and legal issues continue to be at the fore-front of organizational concerns as managers andemployees face increasingly complex decisions.Questionable use of corporate funds, falseaccounting records, and controversial sales tech-niques are common in this decade (Lublin, 1994;Steinmetz, 1994; Stern, 1994). Often thesedecisions are made in a group environmentcomprised of employees with different valuesystems, competitive pressures, and politicalconcerns that contribute to ethical conflict.Nearly one-third of the employees in a nationalsurvey felt pressured to engage in misconduct toachieve business objectives (Goodell, 1994)..Inaddition, nearly one-third of employees areseeing misconduct, but less than half arereporting it to their company (Goodell, 1994).What are organizations doing to support ethicsinitiatives within their organizations? Over halfmaintain a code of ethics (60%), some offer ethicstraining (33%), and some have an ethics officer(33%) (Goodell, 1994).

An organizational ethics program establishesformal accountability and responsibility forappropriate business conduct with top manage-ment. An effective ethics program has thepotential to encourage all employees to under-

Journal of Business Ethics 17: 353-363, 1998.© 1998 Kluwer Academic Publishers. Printed in the Netherlands.

354 O. C. Ferrell et al.

stand the values of the business and comply withpolicies and codes of conduct that create theethical climate of the business. It takes intoaccount company values and legal requirements,helping an organization develop trust and preventmisconduct. Examples of issues in the develop-ment of an organizational ethics program includethe establishment of a code of conduct, organi-zational responsibility for ethics programs, ethicstraining, employee control mechanisms, andprocedures for feedback on, and improvement of,the ethical compliance program. Business ethicsissues often covered in training include breachesof confidence, falsifying records, conflict ofinterest, abusing drugs or alcohol, misuse oforganizational assets, discrimination, and sexualharassment (Moore and DittenhofFer, 1992).

A key problem in administering an ethicsprogram is making ethics a part of an organiza-tion's culture. The influence of managers andco-workers, as well as opportunity to engage inmisconduct, have been found to be key deter-minants of ethical conduct (Ferrell and Gresham,1985). While there is limited information con-cerning the long-term effectiveness of ethicalcompliance programs, companies such as HersheyFoods, Caterpillar, and Texas Instruments expressthe belief that their comprehensive ethicsprograms have been effective in reducing mis-conduct. Top management has often failed todevelop an effective ethical compliance programin companies where serious allegations ofethical misconduct have occurred. Examples offirms without effective ethics programs areArcher-Daniels-Midland and Bausch & Lomb(Maremont and DeGeorge, 1995; Whitacre andHenkofF, 1995). In the latest Ethics ResourceCenter study, nearly one-fourth of the respon-dents believe that their companies engage inunethical behavior to meet business goals, andone-sixth believe their organization encouragesmisconduct to achieve business goals (Goodell,1994).

The government's response to deterringwhite-collar crime is the Federal SentencingGuidelines (FSG), and its goal is to rewardorganizations for establishing a legal/ethicalcompliance program. The guidelines are sopowerful and explicit that "expectations for

reasonable business conduct will never be thesame" (Dalton et al., 1994, p. 7). The effective-ness of a compliance program is determined byits success in preventing misconduct by focusingon the risk associated with a particular area ofbusiness. It should be emphasized that it isimpossible to take a strict legalistic approach indeveloping an ethical compliance program.Failing to incorporate the program within thecorporate culture will result in greater culpabilityand increased penalties.

The purpose of this article is to provide aframework for understanding the legal and ethicalramifications of the Federal SentencingGuidelines of 1991. First, we delineate the natureof the guidelines and the process by whichorganizations are penalized for employee mis-conduct. Second, we examine the guidelines'impact on business ethics programs. The gov-ernment's requirements for compliance programsare discussed in the context of ethics trainingand organizational culture. This article shouldencourage research to assess the effectiveness ofFSG programs on the ethical climate of organi-zations.

The Federal Sentencing Guidelines

The Federal Sentencing Guidelines were devel-oped because of an increase in white-collar crimeand the government's determination to place theresponsibility for such crime with organizations,not just individual decision makers (Paine, 1994).A wide range of organizations can be heldaccountable under the Federal SentencingGuidelines for Organizations, including cor-porations, associations, unions, governments,unincorporated organizations and non-profitorganizations (Ettorre, 1994). The guidelineswere developed by the U.S. SentencingCommission and became effective November 1,1991. These guidelines provide guidance to orga-nizations and encourage internal control systemsby mandating punishment and possible restitu-tion if the organization's internal systems fail.

The Sentencing Reform Act of 1984 autho-rized the U.S. Sentencing Commission to createcategories of offense behavior (i.e., bribing

Federal Sentencing Guidelines for Organizations 355

government officials with over $25,000) andoffender characteristics (i.e., first or secondoffense) that are used to develop appropriatesentence and fine levels. The court must choosea sentence from these guidelines, which differ-entiates among similar crimes and similaroffenders. The FSG are designed to enhance theability of the justice system to fight crime withan effective and fair sentencing system.

Under this mandate, an organization is heldaccountable and responsible and may be indictedif a federal crime is committed by one or moreof its employees. Both federal and state govern-ments are moving toward organizational account-ability for crime occurring within organizationsand will act on it accordingly. In the past, lawslimited the enforcement action to thoseemployees directly responsible for an offense.Due to the lengthy litigation process, by 1995approximately 280 cases had been prosecutedbased on the 1991 FSG. A large number of casesbased on the FSG will probably be produced overthe next few years.

The government has placed the responsibilityfor controlling and preventing illegal and uneth-ical activities squarely on the shoulders of topmanagement (Dow and Muehl, 1992; Fargason,1993). Managers are responsible for their ownactions and those of individuals they supervise.The guidelines include the principle of vicar-ious liability which means managers mustdemonstrate due diligence in attempting toprevent misconduct. Historically, companies haveincorporated for limited liability, but the prin-ciple of vicarious liability means that noworganizations can be held liable if they have notfollowed the minimum requirements of theFederal Sentencing Guidelines for organizations.

To demonstrate due diligence, a company hasto create and document an effective internalcompliance program to ensure an ethical corpo-rate culture. Moreover, ethical and legal standardsmust be communicated to the entire organiza-tion (U.S. Sentencing Commission, 1994). Theobjective is for an ethics compliance program toact as a buffer so that legal violations do notoccur. When violations occur, management mustprove that a proactive compliance program wasin effect.

One of the main reasons for ethics programineffectiveness is the failure to develop an ethicalclimate. A number of empirical studies supportthe view that organizational ethical climate hasa significant impact on misconduct (Ferrell andWeaver, 1978; Morgan, 1993; Wahn, 1993;Bruce, 1994; Grover and Hui, 1994). If thecorporate culture provides rewards or the oppor-tunity to engage in unethical behavior throughdecentralization, weak internal control systems,or a lack of managerial concern, then the firmis in danger of high penalties based on the FSG(Golden, 1993). On a more positive note, manycompanies attempt to set standards much higherthan legal compliance. Corporations such asLockheed Martin, NYNEX, General Motors,Waste Management, Teledyne, and Dun &Bradstreet have codes of ethics, ethics training,compliance programs, and depending on theissue, use various punishments to impedeemployees' misconduct as defined by companystandards. Still all of these firms have both legaland ethical misconduct issues to resolve. DowCorning had a vaunted ethics program that wasa model for corporate America, this program didnot prevent the controversy of silicone breastimplants from pushing the company into bank-ruptcy (Byrne, 1995).

The purpose of the FSG

The main objectives of the Federal SentencingGuidelines are to self-monitor and police, aggres-sively work to deter unethical acts, and punishthose organizational members or stakeholderswho engage in unethical behavior. The sen-tencing of organizations is accomplished withfour considerations in mind. First, the court willorder the organization to remedy any harmcaused by the offense. Second, if the organiza-tion operated primarily for criminal purpose,fines will be set sufficiently high to divest thefirm of all assets. Third, fines levied against theorganization are based on the seriousness of theoffense and the culpability of the organization.Fourth, probation is an appropriate sentence foran organizational defendant when it will ensurethat the firm will take actions to reduce future


criminal conduct (U.S. Sentencing Commission,1994). The guidelines require federal judges toincrease fines for organizations that toleratemisconduct and reduce fines for firms withextensive ethics and compliance activities. Themain thrust for an organization is to avoid themandatory restitution, monetary fines, and affir-mative action steps which result from violations.

Legal/ethical ramifications of the FSG

The escalation of organizational misconduct tothe Federal Sentencing Guidelines began withfederal acts relating to conflict of interest, rack-eteering, privacy, labeling and copyright trade-mark infringement, price fixing, as well as othercorporate crime. The following legislation (seeTable I) requires managers to understand legalissues and develop effective compliance programsto prevent misconduct that could result in anoffense. For example, managers can be prose-cuted under the RICO Act for deriving incomethrough racketeering which is often interpretedas co-worker conspiracy to achieve goals throughunlawful activities. Once a crime has beendetected, the government will consider previousefforts by the company to deter such acts whendetermining its fines and penalties.

If not resolved, most ethical issues related to

laws identified in Table I could result in illegalconduct. Legal violations often result frommanagers stretching the limits of ethical stan-dards, then developing identifiable schemes toknowingly or unwittingly violate the law.

Many federal laws are so complex that legaltraining is necessary to develop training materialsfor the prevention of misconduct. If a companyused only moral philosophy as its foundation forderiving ethical training, it could be deficient inproviding direction for preventing violations oflaw. Therefore, an ethical compliance programmust incorporate both the values and moralfoundations of the company as well as directionsfor preventing legal violations. Laws governingbusiness are not necessarily developed in arational manner that is consistent with the moralrules that individuals use in their personal lives.

Offenses and resulting penalties under the FSG

The offenses under the FSG include all federalfelony and Class A misdemeanor offenses. Majoroffenses governed by the FSG include bidrigging, fraud, customs violations, theft,embezzlement, extortion, drug offenses, civilrights violations, antitrust violations, conflict ofinterest, invasion of privacy, forgery, racketeering,tax fraud, transportation of hazardous materials.

TABLE IMajor federal legislation affecting business managers

Sherman Antitrust Act (1890)

Clayton Act (1914)

Federal Trade Commission Act (1914)

Robinson-Patman Act (1936)

Wheeler-Lea Act (1938)

RICO Act (1964)

Lanham Act (1964)Foreign Corrupt Practices Act (1977)Trademark Counterfeiting Act (1980)Nutritional Labeling and Education

Act (1990)

Prohibits restraint of trade

Prohibits specific practices such as price discrimination, exclusivedealer arrangements and the creation of monopolies

Commission to prevent unfair methods of competition

Prohibits price discrimination among wholesalers and retailers

Prohibits unfair and deceptive acts regardless of injury

Prohibits racketeering activity and the investment of such gains ininterstate or foreign commerce

Prohibits advertising from misrepresenting product characteristics

Promotes effective internal control systems in international business

Provides penalties for counterfeit consumer goods

Prohibits false health claims on processed foods


copyright infringements, and environmentalcrimes (U.S. Sentencing Commission, 1994).

Penalties. The penalties for these offenses arebased on two premises, the seriousness of theoffense and the culpability of the organization.Seriousness is measured in terms ofthe monetarygains or losses suffered as a result ofthe wrongfulconduct. An organization's culpability is deter-mined by the organization's efforts to prevent anddetect criminal conduct and the organization'sinvolvement in or tolerance of the conduct byhigh level personnel or those with substantialauthority. The final consideration in determiningculpability is the actions ofthe organization afteran offense has been committed.

Severe mandatory penalties are required by theguidelines, with base fines ranging from $5,000to $72,500,000 (see Table II). In the past, U.S.district judges had much discretion in imposingfines and sentences. Under the new guidelines,judges utilize a formula to determine the fineranges from which they choose the final fine.Since the government does not have theresources to regulate compliance, federal judgeswere given the power to impose fines on anorganization based on the seriousness of theoffense and the culpability of the organization.Management's lack of knowledge or associationwith the crime is not an adequate mitigatingdefense (U.S. Sentencing Commission, 1994).

Measures that can be imposed upon theorganization, outside of the base fines, include

TABLE IIBase offense level fines

Offense level

6 or less10152025303538 or more

Amount

$ 5,000$ 20,000$ 125,000$ 650,000$ 2,800,000$10,500,000$36,000,000$72,500,000

Source: Federal Sentencing Guidelines for Organ-izations, October 1991.

restitution or compensation to return affectedindividuals to the status quo, a probationaryperiod, a defined term of community service,and/or a notification to all victims of theorganizational activity (Fargason, 1993). Thesemeasures of restitution can virtually "delimit" theamount of financial obligation imposed upon theorganization since there are no fine tables forthese remedial measures.

Seriousness of the offense. The fine that can belevied against an organization committing anoffense is based on the greatest of either pecu-niary gain, pecuniary loss, or the base offenselevel indicated in Table II. Pecuniary gain is thebefore-tax profit gained by the organization as aresult of the offense. A pecuniary loss is themonetary loss caused by the knowing, intentionalor reckless acts of the organization. Finally, thebase fine may be determined by the number andtype of offenses that the organization has previ-ously committed. As the offense level increases,so does the base fine that must be assessed underthe sentencing guidelines.

Each federal offense has been assigned acorresponding base level (i.e., 1 to 38 or more).For instance, the commercial bribery of federal,state or local government officials carries a baseoffense level of 10. However, this level increasesif the bribe exceeds $2,000. Price-fixing andmarket-allocation (i.e., collusion) agreementsamong competitors carry a base offense level of10 but increase as the volume of commerceexceeds $400,000.

Gulpability of the organization. As a general rule,the base fine measures the seriousness of theoffense. However, in order to determine the finalfine ranges, a culpability score must also beassessed. Culpability is based on three interrelatedprinciples. First, organizations become moreculpable when high-ranking individuals partici-pate, condone, or willfully ignore criminalconduct. This can be evidenced by looking at theprior history of the organization - how long hasit been since a previous offense has occurred(10 years: +1; 5 years: +2). Second, in larger andmore professional organizations, criminal conductby high-level employees is increasingly a breach


of trust and abuse of position. The culpabilityscore gradually increases based on the size ofthe organization (10 employees: +1; 5,000employees: +5). Third, culpability increases inorganizations where management's tolerance ofoffenses is pervasive. Other factors directlyaffecting the culpability score include violationsof a judicial order and obstruction of justice.Factors which can mitigate or lessen the culpa-bility level include an effective program to detectviolations ofthe law, self-reporting, cooperation,and acceptance of responsibility (Fargason, 1993).

The base fine depends on the organization'sefforts to prevent the offense as shown by theoffense level. The above fine table can be furtheradjusted based on severity of the offense(resulting in death or bodily injury), the poten-tial threat to national security, the potential threatto the environment, the potential threat to amarket, if the organization is a public entity,and/or if the remedial costs exceed the gainsachieved by the organization (Fargason, 1993).

FSG requirements for the complianceprocess

The Federal Sentencing Guidelines require orga-nizations to develop a compliance program thatcan prevent, detect, and deter employees fromengaging in misconduct. The ethics componentacts as a buffer keeping firms away from the thinline separating unethical and illegal conduct. Tobe considered effective, compliance programsmust disclose any wrongdoing, cooperate withthe government, and accept the responsibility formisconduct. Codes of ethical conduct, employeetraining, hotline phone numbers, complianceofficers, newsletters, brochures, monitoringemployee conduct, and an enforcement systemare typical components of a compliance program.The risk of severe penalties can be reduced underthe guidelines if the organization has establishedan effective compliance program. The corner-stone of an effective program is that companiesmust exercise due diligence in seeking to preventand detect criminal conduct by employees(Golden, 1993).

Although criminal conduct may be defined by

law, the interpretation of ethical versus uneth-ical behavior is often a judgment even whenthere is a program to curb unethical behavior.Most organizations with compliance programsstill have ethics violations as defined by theirstandards of conduct. A recent Ethics ResourceCenter business ethics survey of employeesrevealed that 55% never or only occasionallyfound their company's standards of conductuseful in guiding their business decisions andactions. An additional 8% had never read thestandards, and 45% found ethics training to beineffective (Goodell, 1994). Organizational ethicsprograms have yet to reach a level of effective-ness and usefulness desired through the FederalSentencing Guidelines.

An effective compliance program is more acommitment and process than an exact blueprintfor conduct. There are three major componentsof the process. First, larger organizations arerequired to develop and review formal writtenstandards and procedures for conduct. A code ofethics by itself is not enough to ensure ethicalbehavior within an organization or profession.On the other hand, it is possible for an effectivecode of ethics to provide specific guidelines toaddress major areas of risk within an entireindustry. For example, the Water QualityAssociation has developed a detailed code ofethics that provides specific guidehnes within thewater treatment industry worldwide (WaterQuality Improvement Industry Code of Ethics,1994). Second, organizations must establish andcontinuously revise guidelines for specificoffenses that are most likely to occur due to thenature of its business. For instance, if the orga-nization gives salespeople great flexibility insetting prices, then it must have standards todetect and prevent price-fixing and bid rigging.Price discrimination and human resource issuessuch as privacy and conflict of interest must beclosely monitored by all managers. Firially, theprior history of the organization may indicateoffenses for which preventive action should betaken. The recurrence of similar offenses castsdoubt on an organization's effort to preventmisconduct.


The ethical compliance program

An effective program is a process of continuousactivities that are designed, implemented, andenforced to prevent and detect misconduct. TheFSG suggest a compliance program, with theorganization exercising due diligence by per-forming the following steps (U.S. SentencingCommission, 1994):

1. Codes of conduct must be developed thatare capable of reducing misconduct.

2. Specific high level personnel must beresponsible for the compliance program(i.e., compliance officers) and support theethics/compliance program (i.e., top man-agement) .

3. Substantial discretionary authority in theorganization must not be given to personswith a propensity to engage in illegalconduct.

4. Standards and procedures must be com-municated to employees, other agents (suchas advertising agencies), and independentcontractors (or consultants) throughtraining programs and formal communica-tion systems. (All relevant stakeholdersshould be exposed to the company codeof conduct).

5. The organization must take reasonable stepsto achieve compliance with its standards,by using monitoring and internal auditingsystems to detect misconduct. A reportingsystem must allow employees and agents toreport misconduct without fear (i.e.,anonymous ethics hotlines).

6. Standards and punishment must beenforced consistently in an organization,and the organization must create a processto prevent further offenses.

7. A plan to review and modify the compli-ance program is necessary to demonstratea continuous improvement process in self-monitoring.

These seven steps represent the minimum anorganization can do to demonstrate due dili-gence. The end result of the process is compli-ance and ethics programs that reduce theopportunity for employees to engage in miscon-

duct. Further, the program requires high-rankingpersonnel to be responsible for compliance. Aneffective compliance and ethics program canreduce both employee misconduct and an orga-nization's penalties if crimes are committed.Thus, the reduction of fines is an incentive forfirms to implement compliance programs. TableIII shows the potential mitigating effect an effec-tive compliance program can have on fines. Ahigh culpabihty score has a significant impact onincreasing fine levels.

TABLE IIIFSG ranges based on various culpability scores

Offenselevel

252525

Culpability

1072

Fine

Minimum

$5.6 M$3.92 M$1.12 M

Maximum

$11.2 M$7.84 M$2.24 M

The role of ethics training

An effective ethics training program begins withthe development of a code of ethics (Ferrell andFraedrich, 1994). Usually a specific committeeor person under the direction of top managementserves as the manager of the code of ethicsdevelopment. If employees can participate in theinitiation and implementation of a code, then thevalues, commitments, and beliefs ofthe companybecome a catalyst for the code's creation. Thedevelopment of the code serves as a value foun-dation for successful training and educationalprograms. For ethics training to be effective, thebehef that unethical behavior is ever acceptablemust be eliminated. The key elements of asuccessful ethics program should include at leastthe following (Manley, 1992):

1. an identification ofthe ethical componentof a decision;

2. a mechanism to address ethical issues andidentify emerging ethical issues;

3. an understanding that ethical situations areambiguous by their very nature (i.e., the


correct decision is not always obvious andcan be debatable both inside and outsidethe organization);

4. a provision to help decision makers realizethat actions taken collectively create thefirm's ethical climate.

Ethical training goes beyond legal require-ments and attempts to communicate values thatrepresent the heart and spirit ofthe organization.To be effective, the program must establish anorganizational support system that representscommitment among top managers. To be mosteffective, codes should not focus on exceptionalsituations but attempt to be applicable to thedaily routine and responsibilities of eachemployee. Most effective training sessions,although brief (two to four hours), focus onemployee involvement and developing aninteractive environment in which to discuss theissues. In addition, ethics should be discussed inconjunction with other business communicationand activities, not just in training. If a groupdiscussion involves strategy or performanceconcerns, it is an appropriate forum for theethical implications or issues related to thatparticular strategy or issue.

In addition to ethics training, many organiza-tions also incorporate an ethics task force, full-time ethics program officers, employee hotlines,publications or company policies, and certifica-tion programs. Certification requires employeesto sign a statement that they are unaware of anyviolations against company policy (Fiorelli,1992). Thus, an employee who is knowledgeableabout misconduct and signs the statement is"lying" to the organization. Certification workswell in conjunction with ethics hotlines andother activities because it moves people "on theethical fence" into action.

Although ethics programs and training involvecurrent employees, there are some organizationswhich assess potential employees' values and theirfit with the corporate culture (Posner et al.,1985). This assessment occurs during the inter-view process and is one determinant of anindividual's suitability for an employmentposition. Firms which have strong value systemsand ethics programs may choose to only hire

individuals who hold similar beliefs and values.A good "individual-organizational fit" may leadto less ethical conflict and increased performanceand satisfaction on the part of employees. Simsand Kroeck (1994) found that employees preferfirms that match their ethical preferences and areless likely to leave an organization where anethical fit exists.

Ethics programs have a positive impact onemployees' behavior, as well as their attitudestoward the ethics of coworkers, superiors, andthe corporate culture. The most positiveimprovements in ethical conduct are found incompanies which have all program components,including codes of ethics, ethics training, andethics offices (Goodell, 1994). Finally, an ethicsprogram can only succeed if it is treated as everyother core business function and is adapted andchanged throughout the planning cycle (Edwardsand Goodell, 1994).

Organizational culture relative to complianceprogram orientation

Figure 1 provides a typology for understandingthe two dimensions that are evaluated by thegovernment in a FSG case. The first concern iswhat actions, if any, which supported initiativesin the FSG occurred prior to the offense (i.e.,codes of ethics, ethics training, ethics hotlines,etc.) These factors are important in determiningthe culture of the organization with respect tocompliance. The scope of the complianceprogram is a key determinant of its effectiveness.The second dimension of the matrix addressesthe actions the organization takes after the FSG

Cooperation Maximumwith govern-ment investi-gations after anFSG offense Minimum

ReactiveOrganization

NoncomplianceOrganization

ComplianceOrganization

LegalisticOrganization

Minimum Maximum

Implementation of FSGcompliance programpreceding the offense

Fig. 1. Organizational orientations for federal sen-tencing guidelines compliance.


ofFense has occurred. These actions relate to theculpability of the organization through topmanagement's participation or lack of action afterthe offense occurs and the time frame since aprevious ofFense occurred indicating perhaps anongoing tolerance by management of criminal orunethical conduct. Culpability is mitigated byreporting the ofFense in a timely manner, fullycooperating with the investigation, and acceptingresponsibility for the misconduct (Fargason,1993).

Figure 1 presents four orientations of theorganization (compliance, legalistic, reactive, andnoncompHance). The compliance organization isthe ideal organization and vi hat the FSG hopesorganizations will strive to represent. Such anorganization has made a sincere effort to put intoplace programs and mechanisms in support ofFSG requirements. The compliance organizationalso cooperates completely if an infraction oftheFSG occurs. The noncompliance organization isthe exact opposite of the compliance organiza-tion. It has not shown an interest in complyingwith the FSG and if caught with a potentialviolation, does not cooperate with the federalgovernment. The reactive organization does notengage in activities in support of the FSG untilan infraction has occurred, at which point theycooperate in the investigation. The final typologyis the legalistic organization which has scrutinizedthe FSG and implemented a minimum compH-ance program without commitment to changethe organization. When an investigation occursfor a potential violation, they are not as cooper-ative with investigating ofFicials, feehng that theyabided by the expectations of the guidelines andtherefore any violations should be mitigated bythe estabhshed comphance program. The legal-istic program is not an acceptable FSG programand an investigation by the courts could renderthis approach useless. These four typologies weredeveloped to show possible variance in orienta-tion of the organization with respect to two keyelements of comphance programs and organiza-tions which are evaluated.

Cases tried under the FSG

Approximately 280 cases have now been triedunder the FSG (Davidson, 1995). The mostfrequent offenses include fraud, antitrust offenses,environmental and tax violations. The fastestgrowing violation prosecuted under the FSG isthe evasion of import/export duties (Apel, 1995).Some of the early results are due to implicationsofthe point system. "The guidelines have a pointsystem for assigning penalties and fmes. And sinceits implementation, 91 percent of organizationsplead guilty because points are subtracted forthis" (Apel, 1995). But of those who plead guilty,thus far, 65% ofthe organizations were placed onprobation (Apel, 1995). Probation may meansignificant cost to a firm because consultants maybe required by the court to improve conduct ormonitor activities. The highest fine issued was$7.5 million, and the longest probationary periodestablished was 60 months which was not anuncommon probationary period (Apel, 1995).

A majority (93%) of the organizations sen-tenced under the FSG have been private organi-zations, although publicly held organizations maybe sentenced more in the future. Small businessis a major offender with 79% of all organizationssentenced having less than 50 employees.Organizations with less than 20 employeesrepresent 56% ofthe cases through June 30, 1995(U.S. Sentencing Commission, 1995). Scalia(1995) indicates that large, publicly traded firmsare not being seen in current cases or have notbeen sentenced as much as smaller companiesbecause ofthe complexity and length ofthe casesand prosecutors' tendencies to pursue these casesin civil, not criminal court.

Conclusions

Most crimes and unethical actions are notcommitted by individuals who want to advancethemselves and destroy their organizations.Instead they occur because of two organizationalfactors: opportunity and the actions of peers andsupervisors (Jones, 1991). A corporate culturethat provides incentives and opportunities forunethical activity creates a climate in which


infractions are possible and even encouraged. Forinstance, an overwhelming number of crimes inbusiness (i.e. price fixing, product misrepresen-tation, copyright violation, etc.) stem fromemployee misconduct designed to benefit thecompany. Employees often believe that corporateobjectives have greater importance than legal andethical requirements and that their success istied to the achievement of these organizationalobjectives.

Ethical issues arise because of conflicts amongindividual values, organizational values, andsocietal values. An ethics program to improve theethical climate is necessary to provide a bufferzone to avoid destructive ethical conflict. Whilethere is always some ambiguity in making thecorrect ethical decision, only through topmanagement involvement and open debate anddiscussion of ethical issues can mistakes beeliminated. An issue, activity, or situation that canwithstand open discussion between many groupsboth in and outside the organization and surviveuntarnished provides assurance that the rightdecision was made. An FSG compliance programwith ethics training provides an organizationalmechanism to create openness, discussion, andresolution of ethical conflict.

The Federal Sentencing Commission providesa strong incentive for companies to develop anethics program. The guidelines became law inNovember 1991, and prosecution of larger cor-porations is just beginning in the long litigationprocess. With approximately 280 cases prosecutedto date, it is clear that organizations are beingheld liable for offenses committed by their agents.An important question is whether legal pressureof the FSG is sufficient to change corporateculture to become more ethical. While the initialinterpretation of the FSG is that it operates in amechanical manner, this impression is false. TheFederal Sentencing Commission has made it clearthat compliance programs effectiveness will beevaluated based on the firm's assessment and pre-vention of misconduct in areas where there isrisk. A program must be widely communicatedand must be established before there is miscon-duct in order to get credit. The only time thata company can have its program evaluated by thegovernment is when a violation has occurred and

a federal court is making a determination con-cerning organizational misconduct. Just becausea company claims to have followed the sevenminimum requirements of compliance does notnecessarily mean that a court will find that thecompany has an effective program. Research isneeded to determine if FSG programs improvea firm's ethical climate. In addition, research isneeded to see if companies that have beensentenced under the FSG have changed theirethical climate to prevent future legal problems.

After years of debate over the importance ofbusiness ethics in organizations, the federalgovernment has decided to institutionalize ethicsas a required buffer to prevent legal violations inorganizations. This is the incentive that organi-zations need to show greater initiative in theethics area. IF the guidelines do not get the atten-tion of top management, one mid-level fine fora Federal Sentencing Guidelines violation should.The goal is that companies will see the oppor-tunity to improve their ethical climate and reducethe need for excessive regulation by becoming a"good citizen" in society.

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Department of Marketing,The University of Memphis,

Memphis TN 38152,U.S.A.

Documents

The Federal Sentencing Guidelines Ferrell for Organizations: A