In 2010, Chairman & CEO Louis Chênevert and United Technologies Corporation received the prestigious Stanley C. Pace Leadership in Ethics Award, which was presented by the Ethics Resource Center (ERC). The Pace Award recognizes an individual or group for accomplishments in ethical business management and demonstrated moral vision in the pursuit of ethical conduct. UTC Now spoke with Mike Monts, Vice President, Business Practices, for insight on how the company’s ethics efforts are promoted and reinforced – and what this achievement indicates.

Mike, “business ethics” seems difficult to define. How do you define and measure it?

I like to describe business ethics as the combination of good leadership and good process, because good leadership entails positive behaviors and good process entails systems and controls. At UTC, the leadership component of business ethics is encapsulated by the combination of the ethics competency in personnel appraisal and the CEO's ethics objectives. The process component is captured by Enterprise Risk Management. These structures help to translate business ethics from an abstraction into specific behaviors and concrete actions that can be measured.

In 2005, when UTC sought to reinvigorate the ethics program, the ERC’s survey was used as a diagnostic tool, and their research findings helped to shape UTC’s ethics competency. The ERC randomly surveyed UTC’s salaried employees in 2005, 2008, and 2010, and the results of each successive survey showed improvement. Specifically, between 2005 and 2010, the ERC’s survey data for UTC show a meaningful improvement in three important outcome measures: employee willingness to report code violations (which increased by 6 percentage points), fear of retaliation for reporting (which decreased by 12 percentage points), and pressure to commit misconduct (which decreased by 10 percentage points).

The ERC surveys provide excellent measures of trends, and the ERC data reinforce what the UTC employee engagement surveys already reflect, which is a growing awareness of ethics standards, greater willingness to use the Ombudsman/DIALOG helpline/hotline, less fear of retaliation for reporting violations of the Code of Ethics, and increased confidence that management is upholding the Code. To me, the trends revealed by these surveys are the key measures of progress.

What changes have helped to drive UTC’s performance improvements from 2005 to 2010?

UTC’s ethics efforts since 2005 have evolved to include the following:

• Communications aimed at informing employees globally of our standards;
• Training programs and modules that can be completed online or in-person;
• Toolkits posted online for managers that explain various facets of the ethics program;
• Employee appraisals that include the ethics competency and the CEO’s ethics objectives;
• A formal enterprise risk management process that works to mitigate risk and identify root causes where events did not go as planned;
• More and better audits and monitoring; and
• A strengthened Business Practices organization.

We know that these enhancements are working. For example, between January 2005, and December 2010:

• The number of online ethics courses grew from 37 to 270;
• The number of online ethics courses completed annually by employees increased from 87,000 to 577,000;
• The number of Ombudsman/DIALOG inquires received annually increased by more than 30 percent; and
• The number of full-time-equivalent BPOs increased from about 40 to more than 100.

Aside from these improvements, our Chairman and CEO Louis Chênevert often mentions the cumulative number of employees dismissed during the year for ethics violations. In 2010, 330 employees were dismissed for ethics violations – 169 more than in 2004.

In sum, these efforts led directly to improvements in awareness, systems, controls, and accountability.

During tough economic times, organizations experience lapses in ethics by managers and employees. As we see some economic recovery, what should UTC look out for relative to maintaining its strong focus on ethics?

I’m not aware of any economic cycle, or any particular place in the world for that matter, which is problem-free. Both in periods of growth and contraction, there will be temptations and pressures that threaten to compromise UTC’s ethical and process-driven culture.

We’re a global company, and the growth opportunities are tremendous. When new talent joins the corporation, we work hard to promote our values and we believe firmly that our standards for business ethics can be applied to all of our businesses. As I travel and meet with management teams and employees around the world, I’m consistently impressed with the efforts to implement the ethics program and the shared commitment to the Code. As with everything else in our business, people ultimately make the difference.

Going forward, our biggest challenge to maintaining a strong focus on ethics is to avoid complacency and invest in continuous improvements.

You’ve mentioned UTC’s global footprint. There’s a perception that in some parts of the world – especially in emerging markets that “business” and “ethics” don’t go together. How does the notion of “business ethics” translate globally?

First, as a global company, UTC is highly attuned to and respectful of cultural differences around the world. Even so, at the outset of our improvement agenda in 2005, there were some who wondered whether the principles of the Code of Ethics could become deeply rooted outside the U.S. and Western Europe.

As I mentioned earlier, no place on the planet is exempt from ethical challenges; indeed, even in the U.S. and Western Europe, some are fond of saying that “there’s no such thing as business ethics.” However, I believe that the common denominator for business ethics in a market economy is revealed by the following question: “If I cheat my customers, suppliers or employees, how long will I keep them?" Business is based on cooperation, reciprocity, and being dependable as a trading partner. Keeping commitments is fundamental to business success over the long term because it builds trust, and trust is the foundation for business ethics everywhere.

In contrast, unethical business practices such as bribery, collusive bidding, and deceptive tactics destroy trust, undermine long-term economic viability, and disrupt markets by shifting decision-making from “merit” to “malfeasance.” Business practices which promote good faith performance, fair competition, and transparency enable economies and businesses to function efficiently and effectively over the longer term.

The ethics standards adopted by UTC were intended to build trust and strengthen the culture of the company – both in established and emerging markets. Between 2005 and 2011, the ethics category showed a double-digit improvement in the UTC employee engagement survey, with improvement reflected in every question and in every region of the world. As ethics scores improved, the differences among the regions declined:

• In 2005, the difference between the highest and lowest scoring regions was 22 percentage points.
• In 2011, the difference was 6 percentage points.

These trends – the increased globalization of UTC and its businesses, coupled with the improvement of ethics scores and abatement of scoring differences among global regions - show that UTC’s approach of a single set of standards can work throughout the world.

What do you see for the ethics program next year?

The approach every year is to study the data, challenge our assumptions and seek out opportunities for continuous improvement. The good news is that our Code of Ethics supports the growth and success of our businesses. It does so by helping to ensure that we win business on merit, comply with legal and regulatory requirements, and deal fairly with our employees, suppliers, customers and other stakeholders. The improvement strategy is working; our tools are good and will get better; and the commitment among employees at all levels is outstanding. Bottom line: all we need to do is focus on our fundamental building blocks and then execute