• Breadcrumb navigation uses Javascript

---

Ethics and Corporate Governance:

some guidelines for directors

by Simon Longstaff

There is no such thing as a value-free organisation. The values and principles 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 and principles 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 roles for directors is to help create the conditions and competencies through which an organisation's values and principles can be harmonised in a way that best serves the organisation's mission.

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 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.

If an organisation is to flourish, especially in times of change, then it must manage its values and principles in a way that provides a stable foundation for growth and development. Directors have an important role to play in this process. Bearing this in mind, directors ought 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 principles (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.

While any list of guidelines is bound to be incomplete, the following are offered as a point of reference for directors.

Guidelines

In the formulation of policies and in the performance of their duties, directors ought to:

... recognise that their responsibility is to the shareholders 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.

Many directors are acutely aware of the immediate demands made by shareholders. Some shareholders require that the company act in ways that maximise their immediate profit - even if this is at the expense of other stakeholders in the company (including other shareholders). Although shareholders have every right to look to their immediate interests and although individual shareholders are not bound to consider the interests of others, every director faces a considerably more complex set of obligations. The requirement to act in the interests of all shareholders means that directors risk courting the ire of some.

At the same time there are corresponding obligations (of a different order) to all of the company's stakeholders. This 'conflict of duties' can be the source of grave difficulties. It has been argued by distinguished directors, such as Sir John Dunlop (the progenitor of this guideline), that the recognition of a responsibility to shareholders in perpetuity is the basis for directors resolving such conflicts. While not eliminating these conflicts, the guideline provides a general point of reference when responding to those who are loud in their calls for partial treatment.

Directors should also:

... ensure that they set a positive example of ethical behaviour. This example ought to be set in all the dealings of directors - with each other, with the company, with employees, with customers, with suppliers and with the community at large.

It is a common observation that ethics is better taught by example than precept. It has also been observed that the character and behaviour of leaders is of crucial significance when setting the tone of an organisation. So it is that directors have a particular responsibility to set a positive example. At the very least, this responsibility affects the performance of all duties undertaken in one's capacity as a director. Ideally, all of the director's actions will demonstrate a continuing commitment to high ethical standards.

The maintenance of a deserved reputation for integrity depends on there being a consistent match between one's words and deeds. If a change in role is accompanied by a marked variation in a person's demeanour, then observers are liable to take account of this fact when assessing the trustworthiness and reliability of not just the individual, but also the institution with which he or she is connected.

Directors should:

... ensure that they possess the skills and experience necessary to make a positive contribution to the affairs of the company.

There is no absolute set of standards to determine the skills and experience that a person ought to possess in advance of appointment or election as a director. Some directors bring particular skills, others a wealth of experience and still others an approach or style that is conducive to the furtherance of the company's objectives.

However, although there may not be any pre-conditions for appointment to a Board, each director is under an obligation to ensure that, if necessary, he or she takes steps to develop essential skills that may need to be developed if full service is to be rendered. This, of course, is an ideal and it will not always be possible for directors to devote the time needed to learn and develop new skills, knowledge and understanding.

Where possible, directors ought to augment their existing knowledge and capacities with current information on topics such as: relevant legislation, financial and accounting techniques, standards and conventions, approaches to corporate and strategic planning and so on.

It may be worth noting that The Australian Institute of Company Directors offers a Company Directors' Course that covers these and a number of other important topics. The development of adequate skills, knowledge and understanding will help to ensure that all directors can play an active and equal role in the governance of corporations on whose boards they are called to serve.

As a final point, directors may advance the interests of the company if they institute a programme of continuing professional development for the board as a whole. It will be noted below that such a programme may include sessions devoted to the development of skills associated with the treatment of ethical issues and dilemmas.

Directors should also:

... ensure that the companies under their direction are operated according to best practice, especially in the application of principles of corporate governance.

It is clear that directors have a primary responsibility to ensure that companies under their direction adopt, wherever possible, principles of best practice. While a director's capacity to ensure that this happens throughout the company may be limited in practice, there should be no impediment when it comes to the director's examination of issues of corporate governance.

Directors ought to play an active role in the consideration of such matters, taking account of developments in current thinking and practice. This is to suggest that directors ought to seek out ways to improve the performance of the board. This might involve the development of performance criteria against which directors are prepared to be assessed. These criteria should be developed so as to ensure that each director is capable of performing the role of critically reviewing and developing policy.

There are some companies with boards that operate as little more than 'rubber stamps' to endorse the decisions of senior management. Irrespective of any other problems that might arise in such a situation, there is a danger that companies without the benefit of a strong, active and independent board will shrink from the challenges of developing best practices.

Directors should:

... ensure that stakeholders are sent an unambiguous signal indicating the board's support for principled and ethical business practices.

Stakeholders (shareholders, employees, customers, suppliers, the community and so on) look for unambiguous signals about the standards which are applied by businesses. It is unfortunate that the signals are often confused.

This usually happens when the different elements in large organisations fail to communicate and thereby share the same values. In such circumstances there is a real danger that honest differences of opinion can emerge.

At other times simple errors, such as the occasional breakdown in the observance of company policy can be at the root of perceptions that companies are inconsistent whenever it suits them to be so.

But there are other times when either a lack of diligence or a deliberate change in policy by directors will contribute to, or allow, the evolution of situations that are bound to confound observers of a company. Such occasions may arise when boards act in ways that are patently inconsistent with what the company professes to be its values and commitments.

Directors have a responsibility to ensure that the range of relationships entered into by a company are properly representative of the board's support for principled and ethical business practices. This means that the board might forbid certain business arrangements - even if this means foregoing short-term advantages.

In addition, boards might insist that key business partners act in ways that are sympathetic to the company's ethos. This is not to suggest that policy should be so rigid as to be unable to evolve as part of a flexible response to changing circumstances. There is, however, an onus on directors to be prepared to explain to stakeholders the rationale for departures from settled principles and practices.

Directors should:

... ensure that management is encouraged to foster an ethical climate that is 'owned' by the organisation as a whole.

Given the opportunity to develop the ethos of an organisation, some managers respond by seeking to find a 'quick fix' that will appear to satisfy expectations that 'something be done'.

In this respect it is not uncommon for managers to sponsor the production of a code of ethics or statement of values. Responsibility for producing such a document is usually delegated to corporate counsel, the corporate secretary or to those working in the field of human resources.

Charged with the task of responding quickly, those responsible for drafting the document do so by either working from an existing template or by drawing on personal beliefs about what will be deemed a suitable response. This process gives rise to fairly immediate results that can then be disseminated to personnel within the company.

Although such a process can be relatively efficient, it is unlikely to be very effective. This is because the allegiance that people give to statements of principle is, in most cases, relative to the extent of their involvement and engagement in the process of developing and articulating the statement.

It is for this reason that directors ought to take an interest in ensuring that management involves the whole organisation in the task of defining the company's ethos. Broad involvement (as opposed to control) will help to foster a sense of 'ownership' of the company's values. At the same time, there will be a greater understanding of what the values actually mean in practice. And this, in turn, will mean that there is greater uniformity in the application of and commitment to the company's framework of ethics.

Directors should also:

... ensure that companies under their direction do not merely profess ethical standards as a form of ‘window dressing’. Stakeholders are quick to spot the existence of a ‘values gap’. Just as with individuals, companies risk sacrificing their reputation for integrity when they countenance a mis-match between their words and deeds.

There are some who believe that the chief (and sometimes only) reason for being ethical is that it improves one's business prospects. Those who hold this belief also tend to think that there is a premium in having a reputation for being ethical - and that providing the appearance of ethical behaviour can be maintained, then the obligations to the company have been discharged.

Such an approach is, on one level, open to the strenuous objection that it is based on a radical misunderstanding of the basis for authentic ethical behaviour. At the very least, those who hold such opinions are bound to have only a very tenuous commitment to the principles that they espouse in public.

How would such people respond to an offer to 'manufacture' a convincing semblance of ethical behaviour? To accept such an offer would be to embark on a risky enterprise. Apart from the loss of integrity signalled by such a decision, to move in this direction would be to court significant misadventure. Given previous disappointments, the community has an extremely low toleration of those who cynically manipulate the images of ethical behaviour while behaving in contradictory ways.

Directors have a duty to ensure that companies are not exposed to this type of jeopardy. The best way to achieve this end is to insist that steps to be taken to ensure that there is no mis-match between the company's words and deeds.

Directors should also:

... insist that professional advisers be selected on the basis of their high ethical standards as well as their competence.

Much of what is now recognised as the worst of corporate behaviour in the past would not have been possible without the active assistance of professional advisers. A number of these advisers relinquished their traditional role of acting as 'gate-keepers' with a principal concern to act in a spirit of public service in favour of taking on the persona of the 'gun for hire'.

That is to say, a number of professional advisers placed their own interests above all others. This was often done under the pseudo-justification that the client's interests were of paramount importance and that the professional had no right to judge the ends to be pursued. Having said this, it is equally important to recognise that a number of directors colluded in this process. They set in train policies that were designed to place very great temptation before advisers who would have, in other circumstances, steadfastly maintained their independence.

Other directors adopted policies that required that advisers be selected entirely on the basis of their skills and without reference to their integrity. Although policies such as these are bound to ensure that directors receive advice that they find to be amenable, it is unlikely that the advice can be relied upon in any meaningful sense.

Directors who succumb to the temptation to select 'guns for hire' risk the interests of the company's stakeholders and ultimately, expose themselves to censure.

Directors should:

... insist that companies under their direction observe the spirit as well as the letter of the law.

This guideline is likely to be regarded by some as especially contentious. There is a strong current of argument along the lines that it is entirely appropriate for the law to be interpreted quite literally and that it is legitimate and proper for persons to test the law, providing that they do so in good faith.

Yet it is clear that there are some people who take advantage of drafting inexactitudes with full knowledge that in doing so they ignore the express intention of the legislatures or courts. When individuals act in such a way, they are in effect saying that 'they know best' and that community obligations can be set aside as a matter of convenience.

In those circumstances where the 'spirit' of the law is clear, directors need to think carefully before taking advantage of loopholes. At the very least directors will need to give an account of the principles that they apply when deciding whether or not to follow the strict requirements of the law. Directors should also bear in mind that a failure to observe the law may expose them to censure and even prosecution.

Directors should also:

... ensure that the policies and practices of the company are such that ethical behaviour is recognised as being intrinsically desirable and that no officer or employee of the company is rewarded for achievements based on unethical activities - irrespective of their contribution to profits.

It will have become apparent that directors have a particular responsibility to ensure that the values of the company are reinforced in all of its activities. This means that directors need to guard against the perception that good ethics is only warranted by the principle that such behaviour leads to improved business performance.

As noted above, there is nothing inherently wrong with accepting the collateral benefits that flow from ethical behaviour. However, there is something rather disturbing about the idea that ethical behaviour being reduced to a type of pragmatism.

Having said this, directors need to ensure that the processes of recognition and reward are structured within the company so that ethical behaviour is encouraged. This means that performance evaluation and remuneration ought to be based on factors other than that of simple performance.

People can achieve 'pleasing' results in many ways - some of which would be justifiably open to censure. This is to recognise that the ends do not necessarily justify the means. There are few things more likely to destroy the disposition to be ethical than to witness unethical behaviour being handsomely rewarded.

Directors should:

... recognise that there may be occasions when ethical principles come into conflict and that there will be times when one principle will be sacrificed in the service of another. When it is necessary to give preference to one ethical value over another, then the decision ought to be explained to the affected parties and ways sought to minimise any damage to the competing value/s.

While it is sometimes necessary to state individual principles in fairly bald terms, it is equally important to recognise that ethical issues rarely present themselves in terms of clear cut principles of 'black' and 'white'. Indeed, it is far more common for the ethical landscape to be painted in shades of grey.

Directors will need to address ethical issues such as having to resolve conflicts of duty that can arise in response to the claims of various stakeholders, or to do with the extent to which information about the company ought to be disclosed to interested parties, or how to respond to the challenges of operating in a different cultural environment and so on.

At the same time, directors are liable to encounter genuine ethical dilemmas. These dilemmas arise in circumstances such as when individually valid principles come into conflict. For example, many people hold to the principles that is wrong to lie and that it is wrong to cause harm to others. What does one do when to tell the truth would be to cause harm? There will be times when it is necessary to follow one principle at the expense of another. This may be akin to finding the least bad option.

When directors find themselves in a position where it is necessary for them to choose, then they should try to minimise the amount of 'damage' that is done to the competing value. This is especially important when called upon to explain a particular course of action. It is therefore in the interests of directors to record not just the decisions made in such cases, but also the arguments that support those decisions. This is to suggest that there will be times when an element of narrative should be introduced into the minutes or supporting papers of a board.

Directors should:

... develop their own ability to assist management in the resolution of ethical issues and dilemmas (Where directors lack the necessary skills, then suitable assistance should be sought).

The previous discussion highlights the difficult terrain that is likely to be encountered in the ethical landscape. This same terrain is traversed by management. It is not unreasonable for managers to look to directors for support in the resolution of ethical issues and dilemmas that impinge upon company policy.

It is therefore important that directors be competent to render assistance. There are some who believe that common sense is all that is needed. Those who hold this view have a poor appreciation of the way in which 'common sense' can lead to contradictory policies and outcomes. Rather than common sense, there is a need for wisdom. Wisdom can be usefully augmented by a capacity to reason and, equally importantly, to adopt a range of perspective from which any problem can be viewed.

Boards of directors ought to engage in programmes of professional development. Such programmes ought to include opportunities to develop the skills of the 'reflective practitioner'.

Finally, although there are no 'experts' whose judgement can be substituted for those who must take responsibility for deciding such matters, there is a growing number of professionals who can offer assistance to directors and mangers. Various ethics centres, such as St James Ethics Centre, have been established to serve the business and professional communities and are easily contacted.

discuss this article

---