Ethical Performance
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Taking executive decisions about ethical behaviour

October 2013

New IBE research has shown an apparent lack of explicit engagement at EU level with ethical principles in corporate governance guidance. There is limited requirement, or indeed encouragement, for boards to operate with high ethical standards. Leading edge companies increasingly recognise that embedding business ethics, sustainability and social responsibility throughout their operations as being essential for long term success. But boards can lag behind when it comes to examining their own behaviours and how ethical values ought to apply within the board room.


What can boards do to avoid their own integrity failures and actively demonstrate that they are committed to ethical standards in the way they govern and conduct themselves?

Purpose, strategy and vision
The choices made by senior leaders are open to analysis by all stakeholders, and there is a very real potential that board members could be pursued individually in the courts for any decisions they make. This means that mechanisms need to be introduced which will facilitate the consideration of the ethical dimensions of board decisions. This is the perspective that asks the question ‘how does this fit with our values and the way we do our business?’

Few directors would query the need for strong ethics and compliance within their business, but the need remains for rigorous ways to help them engage with their own decision-making processes.

Persuading boards to put the promotion of ‘how business should be done’ on a par with core operating strategies is a significant challenge. The challenge is how to define an ethical approach and then to apply it. It can take a great deal of courage on the part of a board, and sometimes be ‘costly’, to embed ethical thinking within strategy.

Tough issues like operating in territories with questionable human rights records, require boards to be equipped with ethical sensitivity and the right leadership skills. Although a company might say “we will not do business in countries where there is a risk of us becoming involved in human rights abuses”; or “we will not do business if it contravenes our ethical values”, in practice, these statements are difficult to deliver on. It is easier if the strategy can be explained clearly to the company’s shareholders and wider group of stakeholders using the company’s code of ethics as a reference point. (Anglo American’s decision to invest $400 million in a mining project in Zimbabwe is one example.)

The distorting influence of time pressures should not be underestimated when it comes to encouraging an ethical dimension to board decisions. Offering training in ethical decision-making or away day sessions on ethical issues and risks for the company will give board members the opportunity to consider these matters in a neutral and reflective space. The building of ethics into strategic reviews will, over time, become part of the board psyche.

Example and leadership
The continual reference to and demonstration of ethical values and by board members are essential if a board wishes the rest of the organisation to operate in line with a set of core values, and for it to enjoy the benefits which doing business ethically can bring.

It goes without saying that members of boards should have personal integrity, as well as being champions of the company’s values. So, recruiting the right board members with the experience and ethical acumen to support the organisation is a good way to ensure that ethics is part of the language of the board.

Oversight and controls
In order for the directors to influence the ethical culture, they need first to establish meaningful values for the company and develop the policies, mechanisms and controls, an ‘ethics programme’, that support employees in making ethical choices. They need to understand the ethical challenges that employees face and the pressures that might drive them to cross ethical lines.

The board needs to know what is truly happening both within the company and its sector in order to make sound judgements in the best interests of the company,. As part of this, directors need to monitor the extent to which the company is really living up to its stated values, otherwise all pronouncements on ethics will be viewed as flimsy and without substance. Using monitoring and assurance tools, such as the Investing in Integrity charter mark (www.investinginintegrity.org.uk), checks that the boxes are ticked, but it also assesses the extent to which the company is doing what it says it does ethically, as well as financially.
Ethical assurance and monitoring are vital risk management tools; as we have seen in recent years, risks to integrity do need to be deemed a threat to financial performance.

Summary
The board’s role is to give direction. It is vital that it provides an ethical compass for the organisation that it oversees especially when executives, immersed in the day-to-day business of the company, may be unable to do so. It is vital that board members are aware of the ethical issues and challenges affecting their sector, their company, their executives and their staff. They must continually develop their own ethical sensitivity and acumen, and use it actively to strengthen the culture and mitigate integrity risk - as a preventative measure and not just so as to be able to handle the ethical lapses once they have happened. Above all, they must look to themselves. To coin a phrase “ethics begins at home”: if the board are confident that their own way of governing has ethics at its core, the rest will surely follow.

A Review of the Ethical Aspects of Corporate Governance Regulation and Guidance in the EU by Julia Casson is available as a free download from IBE’s website http://www.ibe.org.uk/userfiles/op8_corpgovineu.pdf
IBE’s Good Practice Guide: Ethics in Decision-making by David Barr and Chris Campbell is available here 

 

Written by Dr Nicole Dando, head of projects at the Institute of Business Ethics
 




Global | Corporate governance

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