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The role of directors in the development of a corporate ethos

by Simon Longstaff

Introduction

It has been observed that the range of duties owed by directors seems to have multiplied over the last couple of years. Yet, it is possible that changes, such as those reflected in the Corporations Law, are best seen as evidence of an evolving process in which existing, implied duties of directors are now being made quite explicit.

This is not to suggest that the legislative route is either the only, or the best way in which to draw the attention of directors to the full range of their responsibilities. However, one needs to be conscious of the fact that the role of the director demands commitments that some have previously thought to be of only marginal importance. One such commitment is a recognition of the need to play a conscious and critical role in developing the values and ethos of the organisation.

This is to recognise that one of the responsibilities of a Board is to think about and foster the development of a corporate philosophy that permeates the culture of the organisation. What is the value system of the company? What sort of image does the company wish to project? How should the company understand itself in relation to notions such as 'corporate responsibility' and so on? Who are we, and what do we stand for?

This is not to suggest that directors should see themselves as anointed sages who are uniquely qualified to articulate a 'vision' for their organisation. This would be to misunderstand the important creative role that directors can play. As will be seen below, a board will act as the catalyst for a process that needs to work itself into the sinews of a company. Most importantly, a board needs to cultivate an atmosphere in which the management of values is seen as having a high priority.

There is a further role for the Board in respect to such matters. Directors are not just there to make the right noises. It is easy to arrange circumstances so that a company and its personnel appear to adhere to a laudable corporate philosophy. However, directors have a further duty to ensure that the design of the company's institutions and processes are such that they too reinforce the maintenance and application of values that have been articulated.

This does not mean that directors have to become 'ethics police' stalking the corridors looking for specific incidences where the firm's values have been traduced. But it does mean that the board should have a 'watching brief' so that management knows that the proper expression of corporate philosophy is to be taken seriously.

As a final point in this introduction, it should be stressed that there is no formula for developing a 'true' set of ethical principles that will guide a company. And there is no way to escape the complexity that is an inherent part of life in all its dimensions.

The ethical landscape is frequently sketched in tones of grey. This is not because there is an absence of opinion about where to paint the blacks and whites. Rather, there is sometimes too much opinion - much of it contradictory. And even where everybody seems to be in agreement, then there is the problem that equally valid principles frequently come into conflict. The point of all of this is that the board will frequently be called upon to give counsel in the resolution of ethical issues and dilemmas. This is an important dimension of support that the board can and should offer to management. It is therefore essential that directors be capable of considering such matters in an informed and competent fashion.

So to summarise, directors ought to see their role as including a capacity to:

• recognise the need for a properly developed corporate philosophy and ethos,
• stimulate the development and articulation of a corporate philosophy and ethos,
• ensure that there is a proper appreciation of the importance of managing values (and not just processes, finances, risk etc.),
• ensure that the institutional design of the organisation under their direction is such that it reinforces (and does not undermine) the values that it purports to represent,
• provide considered advice and assistance in the debate and resolution of ethical issues and dilemmas that arise from time to time.

The need for a corporate philosophy and ethos

It may be appropriate to begin by saying something about the nature and meaning of ethics. Quite a few people will automatically think of ethics as providing a system of guidance based on a set of principles or rules. These rules will help us to determine what is good, bad, right or wrong. There is a good deal of truth in this perception. However, it needs to be viewed in a much broader context.

Have you ever noticed that a lot of people seem uncomfortable when the discussion turns to ethics? Sometimes, the reason for this is that they think that the whole subject is too theoretical or that ethics is the same as morality - and therefore, for many, a private matter. While understandable, both positions need to be reassessed.

Ethics is about as practical a subject as you can get! For example, one of the first questions in ethics was asked by the Greek philosopher, Socrates, who lived in Athens at around 500 BC. His question was a deceptively simple one. He asked: “What ought one to do?”.

As you can see, it's not a question of theory. Instead, we are asked to think about how we should live our lives (in every aspect) and about what kind of people we ought to be.

This leads to a second point. Ethics is not the same as morality. To be talking about ethics is to be involved in a conversation about what we ought to do. Moralities provide alternative answers - different moralities are like different voices in that conversation. So there is a Christian voice, a Jewish voice, an Islamic voice, and so on ...

Then there are the voices of secular philosophers and all the others who think that they have something worthwhile to say on the matter. Perhaps the most interesting thing is that most of these voices share a lot in common - often saying the same thing in a slightly different way.

Yet there are real differences and the tricky part, for all of us, is to pick out those voices that seem to be speaking to us with the most sense and inherent truthfulness. We are also faced with the challenge of joining in the conversation. If we are going to do that, then we will need to feel comfortable about using the language of ethics.

How many of us feel comfortable about speaking of these issues at all? Many feel that they will be looked down as being a little 'weak' or pious if they institute a discussion about ethics. Others think that it is all irrelevant; just a waste of time. This can be the context in which people find themselves unable to ask even the simplest of questions, "Is it right?".

However, part of the power of Socrates' question is that it shows that we cannot avoid ethics - even if we want to! We might pretend that we aren't involved in the conversation. However, every time we make a choice, and every time we take a decision, then we subconsciously reflect our values and commitments. That is, we send a signal about what we think one ought to do in such-and-such a situation and at such-and-such a time.

Now, what might this have to do with directors in their relationships with their companies? Perhaps the answer is best developed by making reference to the ideas of one of Australia's best regarded directors. The late Sir John Dunlop expressed views that many would regard as having been ahead of their time. Speaking in 1964 he observed:

I put it to you that the directors are responsible to the shareholders for profit in perpetuity; and that this general expression of a principle permits, indeed requires, directors to pay full regard to their employees, to labour relations generally, to the community, to the country, in all their decisions for and on behalf of shareholders.(i)

This is to recognise the claims of those who, in current parlance, would be referred to as stakeholders. Sir John Dunlop saw that the interests of shareholders could only be properly protected if directors saw their role as that of trustee. But such a recognition comes at a price. It is a relatively simple matter to decide what one ought to do if one's obligations are seen to be exhausted in service of the interests of current shareholders.

However, when there is a diversity of immediate interests - some of which may compete, then there is a need to provide a framework in which decisions can be made. That is, there is a need to develop a set of guiding principles founded on established values.

Stimulating the development of a corporate philosophy and ethos

Some directors are tempted to believe that the introduction of a Code of Conduct will absolve them of the responsibility to manage the values of an organisation. Nothing could be further from the truth. As is the case in the general community, ‘Black Letter Law’ solutions are rendered relatively ineffective if applied in a culture where those affected have little understanding of the underlying principles that inform the Code and/or where there is no disposition to ensure that the Code is applied consistently. This lack of effectiveness can result even where there is a regime of strict enforcement.

It is unfortunate, but true, that there is no 'quick fix' when it comes to building a corporate ethos. Rather, there is a need to develop a range of values and dispositions that provide a foundation for responsible behaviour. Where these values have been developed, then they need to be expressed in the logical relationship between both a Code of Ethics and a Code of Conduct.

Each code will fulfil a different function. A Code of Ethics expresses fundamental principles that provide guidance in cases where no specific rule is in place or where matters are genuinely unclear. On the other hand, a Code of Conduct ought to be consistent with the primary Code of Ethics. However, it will provide much more specific guidance. A Code of Ethics is akin to examples of what has been termed ‘Fuzzy Law’. A Code of Conduct is closer to traditional ‘Black Letter Law’.

Although it is necessary to recognise and apply this distinction, it is not sufficient. There is little point in applying principles that people either oppose (at a fundamental level) or fail to understand. There are many organisations whose members can recite the canon of values, visions, rules and regulations - while at the same time behaving in ways that are diametrically opposed to the principles that are espoused. This failure of integrity is not, as some think, a conscious act of hypocrisy. Rather, it is symptomatic of a culture in which people have failed to engage with the meaning of that which they profess.

Directors will quite properly be inclined to 'delegate' to management much of the responsibility for the process of developing a Statement of Values or Code of Ethics. However, even in making this delegation, directors can continue to play a significant role by clearly signalling that they consider that the processes to be followed are a matter of continuing importance to the board.

More specifically, directors can indicate their preference for those processes which are most likely to ensure that the organisation's values take root. This might mean that one resists the temptation to institute a ‘quick fix’. Under pressure to resolve such matters as speedily and cheaply as possible, directors and management may see some merit in sub-contracting the development of a Statement of Values or Code of Ethics to an 'expert' either within the company or, perhaps, a consultant. Either will be thought able to modify some pre-existing statement of values which can then be adopted by the company.

While relatively cheap and convenient, such a process rarely progresses the cause of integrating values into the culture of the organisation. To the extent that such a process fails, then so has the board failed in its overview of one of the critical functions of management.

To summarise, the board ought to bear in mind four key principles:

1. There is a need for commitment from the top. And that means from the board and senior managers. Not just a verbal nod, but a real commitment. Unless that happens people will be justified in asking questions about the level of sincerity lying behind the development of an organisation's ethics.
2. It will be useful to document the agreed values of an organisation. Such a document will set out the fundamental principles which people are going to hold to. Codes are very important documents - a bit like the Ten Commandments, in that they make sure that important principles are kept before us. The trouble is that items written in stone tend to become lifeless unless someone takes particular care to nurture their understanding. And a dead code is virtually worthless. A code has to be something that is alive. It has to be 'owned' by all the people who have to observe it. It is not enough that it be approved by management, or by the board. To be really effective an organisation's code should evolve in consultation with all the people it affects. They principally are all the people who belong to the organisation, and often those who have contact with the organisation - suppliers, customers, and so on. Taking account of the needs of stakeholders will help to breathe the life of relevance in to a code.
3. There also needs to be a commitment to review the code continually. Does it still make sense for this organisation?
4. The organisation has to be aware of any 'blockages' that may prevent an accumulated store of commitment and goodwill from actually working to the benefit of the organisation. As noted in the introduction, it is pointless having a code and a commitment from management and staff if management systems or the practices of the organisation are inimical to the development of an appropriate ethos.

A final word before moving on. It is important to realise that there is no single set of values that is appropriate for all organisations. Nor is there a need for homogeneity. Although there will be much that is shared, there are good grounds for accepting the distinctive character that might belong to an organisation. Indeed, such differences may be part of what is offered by an organisation to its stakeholders.

Ensuring that there is a proper appreciation of the importance of managing values

Directors have an obligation to reinforce managers' understanding of themselves as occupying positions of leadership. Part of the leader's role is to ensure that values are managed in a way that avoids the appearance of what has been termed a ‘values gap’. This is not just a matter of consistency, it also touches on the larger question of whether or not the organisation is keeping values-questions before it, and under review. A 'values gap' can occur at the level of the individual manager or it can affect the whole organisation. Andrall E Pearson gives an account of the danger:

Managers need to ask the tough question: Do we have the right values for right now? And the place to begin is by honestly confronting the ‘values gap’ that has developed in most large companies, the pervasive difference between what the company says it stands for and what it actually delivers. The values gap is the largest source of cynicism and scepticism in the workplace today.(ii)

The maintenance of credibility is an essential prerequisite for effective leadership. A good leader will be consistent and will lead by example. And this means having a proper appreciation of the demands of what can be called ‘ethical management’.

Ethical Management is a form of management that is concerned not only with the technical, financial and legal aspects of a business, but also recognises and manages the values that operate at the heart of any enterprise. These values affect everyone in the organisation and all of those with which it has some association.

In point of fact, there is no such thing as a value-free organisation. The values adopted by an organisation can be for good or for ill. That is, they can contribute to the organisation's ability to achieve its objectives or they can act as a hindrance. Given that values shape an organisation's ‘climate’ or 'culture', it is important that they be identified and managed in the best interests of the organisation and the people that it is there to serve. One of the key objectives of ethical management is to create the conditions and competencies through which an organisation's values can be harmonised in a way that best serves the organisation's mission.

Much current management theory implicitly (and sometimes explicitly) recognises the importance of the ethical dimension. For example, the principles of Total Quality Management (TQM) contain the seeds for sound ethical management. The TQM approach is based on a recognition of the need for continual review of the processes of production and provides diagnostic tools of measurement to determine performance and measure progress.

The tenets of TQM are readily applied by management to the technical areas associated with the systematic control of goods and services that are produced for internal and external customers. However, this same approach can deliver impressive results when applied to the task of examining the prevailing culture of an organisation and its constituent parts. In this respect, it can be seen that the principles of TQM can be extended beyond the technical aspects of the business to the values that are operating there.

TQM's emphasis on a management style that is consultative and participatory, together with its emphasis on collaboration through the two-way flow of information and the use of teams, holds potential for effective ethical management. As noted above, values are what shape the corporate climate within which all the other productive processes are operating.

When we speak, therefore, of ethical management, we are discussing an integrated approach that recognises the utility of examining the values that influence "the way things are done around here". The utility of such an approach can be found in the fact that an organisation's dominant values have a significant effect on, among other things, morale and productivity.

But there is another reason for examining such matters. Leaving aside questions of increased productivity, higher retention rates, improved compliance and so on; there is also the issue of simple decency in the way in which we organise our social institutions.

We sometimes act as if businesses can exist as totally independent entities. This dangerous fiction obscures the fact that businesses, governments, indeed all of our institutions are created by and for people.

To take a serious look at values and ethics is to make a statement along the lines that we recognise the importance of the human dimension in what we do. It says that whilst notions of efficiency are important, they are not the whole of the story. It recognises that people are not cogs in a machine. It says that we are concerned about the kind of community that we want our organisation to be. It says that people matter.

Directors ought to consider how it is that they can reinforce and support the process of managing values in the organisation.

Ensuring that the institutional design of the organisation reinforces (not undermines) its professed values

As noted above, directors have an important role in fostering the development of an organisation's values. However, it has already been observed that there is further need for directors to accept a 'watching brief' to ensure that unforeseen problems in institutional design do not frustrate attempts to reinforce the organisation's professed values.

Directors are already aware of the important work that can be performed by audit committees. The work of such committees is supplemented by the more general practice of directors continually, constructively and carefully asking the right questions of management.

Perceptive questioning about the management of values will help to expose incidences where the development of 'custom and practice' have instituted less than desirable habits. For example, it may be that the 'lore' of an organisation is such that people come to understand that what the board and management says and what they mean are quite distinct. Such an understanding can arise without there being any cynicism on the part of directors, managers or their colleagues.

Rather, people will simply and quite innocently draw conclusions from their observations of what actually happens in practice. So, a company may extol the virtue of "being responsible to the shareholders for profit in perpetuity" yet fail to reward employees who act in a manner that is consistent with the application of that principle and with the company's code of ethics. For example, remuneration and advancement might be calculated solely on the basis of securing short-term benefits. The point is that:

No Code of Ethics and no amount of cajolery by the chief executive will have much effect if promotions regularly go to the people who pile up big numbers by cutting corners.(iii)

It will be seen that directors have a legitimate interest in seeing that the values of an organisation are reinforced. Thus, directors might seek comfort from management that the performance and appraisal regime allocates sufficient weight to factors such as the ethical manner in which people go about their business. Or directors might be interested to ensure that there are positive policies on matters such as how a company will deal with whistleblowers - will there be internal mechanisms designed to encourage the free and frank expression of opinions and misgivings, as opposed to the application of de facto penalties for those who raise concerns.

In the same vein, directors will need to set, and occasionally monitor, policy on matters such as the treatment of information in which the public might have a legitimate interest but which may harm the organisation's reputation? For example, if a product is found to be dangerous, will the board be in favour of a policy of prompt and voluntary disclosure, or will it send a message that deceptive behaviour is to be tolerated?

At a more basic level, are there ever circumstances where employees are expected to lie on behalf of the company - such as when they are instructed not to disclose the availability of a particular product that the company must reluctantly offer for the time being.

Are issues such as how to deal with conflicts of interest treated in a consistent manner? Or do the rules vary to suit different groups in ways that are neither fair nor fully justified? Finally, will directors insist that business practices be of a uniform standard of integrity irrespective of the jurisdiction in which the enterprise is being conducted? Or will personnel come to see that where profits are concerned, the company's principles are not just pragmatic, but fairly malleable?

A concern for such issues will not exhaust the range of matters to be considered by a board that has an overview of the way in which the company's institutions affect the task of managing its values. The examples that have been given merely indicate the types of concerns that a board might keep before management.

Providing considered advice and assistance in the debate and resolution of ethical issues and dilemmas

Directors are called upon to consider matters that are inherently complex. It has been argued that every issue to be considered has an ethical dimension and that it is part of the director's duty to ensure that the ethical dimension is given due weight during the course of deliberations.

However, it was noted above that there is no set of guide-lines that commands the assent of all people. It was further noted that even the most well-founded principles can come into conflict. This is part of the context in which managers are called upon to make decisions.

An additional factor to be considered is that managers operate in close proximity to the problems that they solve. It is not unknown for competent managers to lack the 'analytical distance' that is needed to see an issue in its proper perspective. Hence there is an invaluable role to be played by directors when offering management guidance and assistance. But, in turn, this means that directors have an obligation to have a reasonable degree of competence in dealing with such matters.

This is not to say that directors are required to evolve into the corporate version of 'philosopher kings'. But it is to say that they need to be prepared to encourage the debate of ethical issues as an integral part of their work.

Perhaps more than knowledge or common sense, directors need to display wisdom. This is to advocate what many would recognise as nothing more than existing best practice. Yet, there may be many who see such a contribution as being somewhat ‘soft’ when compared to the ‘hard’ sciences of reading balance sheets and devising strategy.

Having said all of this, it is quite likely that although directors will be disposed to contribute in such discussions, they will feel a difficulty in doing so because the language of ethical discourse is lost to them. In such circumstances, there may be some benefit in enlisting the services of someone who can assist board members in their attempt to regenerate their skills as they wrestle with the issues that are put before them.

Conclusion

In March 1980, Sir John Dunlop presented an address to the Institute of Directors in Australia entitled, Some Nebulous Advice (iv). In the course of this address Sir John explored a number of themes that are of contemporary relevance to society. They included: the place of business in society, the guiding principles of the market, Australia's future, the role of organised labour and the government and, of course, various skeins of practical advice for directors.

Some Nebulous Advice is primarily a paper full of ideas and challenges. It does, in many respects, represent the best that can be hoped for from directors - namely, that they be unafraid of ideas and that they be prepared to challenge the organisation which they direct.

It is one of Dunlop's contentions that it is ultimately self-defeating for any person to erect a social organisation without a supporting social morality. While talking about society in general, it is clear that the same observation applies to individual units in society - such as businesses.

There is a growing awareness that organisations and individuals are subject to constant change. Bearing this in mind, it becomes obvious that a stable platform of values is needed for those who would respond with confidence to the emerging challenges and opportunities that lie before them. Even the nimblest of acrobats relies on there being a firm foundation as an ultimate basis for support. So it is that directors fail their organisations, and ultimately their shareholders, if they fall into the trap of treating the issue of ethics as an 'optional extra'.

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