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Ethics and corporate performance

by with Simon Longstaff

Q: What part do ethics play in an organisation's responsibility to 'perform' for its stakeholders?

In companies today, maximum performance will only be achieved by those companies able to trust their people to make sound decisions within a condensed time-frame. Such people will need to exercise a considerable degree of autonomy. Yet, at the same time, risk to the company must be minimised.

There was a time when people thought that risk could be controlled through the application of detailed rules, regulations and compliance regimes.

We now know that this approach is highly unstable and relatively costly. Things move too fast and are too ambiguous for the old paradigm of command and control to work. Instead, prudent boards and management should evolve corporate cultures in which decisions are based on the application of general values and principles – rather than specific rules and regulations.

The challenge for companies is therefore to create an environment in which its people feel that the values and principles at work within the company are real. The trouble is that it is extremely difficult to do this if the company adopts a minimalist approach and therefore seems prepared to sacrifice anything and everything in the name of increasing shareholder wealth.

Paradoxically, the key to shareholder wealth is to be found in sincerely believing in a purpose for the company that goes beyond this. The evidence for this conclusion is quite compelling.

For example, recent research suggests that a proper concern with the ethical environment of a corporation is essential to long-term business success. Many are familiar with an interesting book, Built to Last: Successful Habits of Visionary Companies. The authors, James Collins and Jerry Porras: (wrote)

... took a set of truly exceptional companies that have stood the test of time – the average founding date being 1897 – and ... set out to discover the timeless management principles that have consistently distinguished outstanding companies.

One of their key findings is expressed thus:

Visionary companies pursue a cluster of objectives, of which making money is only one – and not necessarily the primary one. Yes, they seek profits, but they're equally guided by a core ideology – core values and a sense of purpose beyond just making money. Yet, paradoxically, the visionary companies make more money than the purely profit-driven comparison companies.

A moment's reflection should suggest why the increased profitability enjoyed by 'visionary' companies is not all that paradoxical. Any organisation capable of managing the complexities associated with paying proper attention to the way in which values are expressed in practice will be well-equipped to cope with the burgeoning complexity that defines the world in which we live.

Q: Where do concepts of 'trust' fit into this concept of board performance?

An organisation that deals with the ethical dimension of all its activities will be, at the same time, building a high-trust environment. As we know, high-trust correlates with low cost. This is especially so when ethical commitments are reinforced so that they become part of the deep structure of organisations.

In these circumstances, blind rule following is replaced by compliant behaviour based on the voluntary expression of dispositions that accord with desired practices. A certain degree of vigilance is still appropriate. However, far less supervision is required. And where rules are silent or ambiguous, there is still a basis for proper action.

Perhaps this is why McKinsey & Co found, in 1995, that US companies which lived their values and were seen as 'visionary' outperformed the Wall Street norm by a factor of fifty over the last several decades.

All of this relates to the performance of boards in a very direct way. Directors are required to provide leadership to the corporation. As such, they need to model the very values and principles that they rely upon for the overall success of the company.

But beyond this, there is a further requirement that was touched upon above. This is that directors have a capacity to engage in the wider kind of debate that current and future companies will have to address. This ability is not a skill that can be picked up overnight. Rather, it needs to be fostered under the careful guidance of a chairman. Yet, not all chairmen are equipped for this task.

Q: How, Then, can the Company Secretary Make a Pro-active Contribution to This?

I would want to suggest a very significant role for the company secretary. Working at the chairman's right hand, a proficient company secretary will be far more than an amanuensis. He or she will also be a trusted professional adviser possessed of sound, independent judgement – part of the management team and yet, somewhat apart.

I sometimes think of corporations as if they were ships at sea. A marginally competent sailor can get by when the wind and weather is fair. However, a combination of technical excellence, experience and sound judgement is required by those who would survive the occasional tempest. Many boards are forced to pretend that they are coping – even as they feel themselves caught between Scylla and Charybdis!

Every captain needs a confidante who can act as a sounding board when tough decisions must be made and executed. This means that there will be occasions when the corporate secretary may need to adopt a position of providing disinterested advice that goes beyond that of setting out the formal requirements of the law and applicable regulations.

Indeed, it could be argued that corporate secretaries are bound to adopt this role because of their chosen status as professionals. Belonging to a profession means accepting that there is a significant (if not overriding) duty to act in a spirit of public service. In fact, this determination to act in this spirit is the key defining characteristic of a professional.

One particularly influential definition of a profession was offered by Roscoe Pound. It goes as follows:

The term refers to a group ... pursuing a learned art as a common calling in the spirit of public service – no less a public service because it may incidentally be a means to livelihood. Pursuit of the learned art in the spirit of public service is the primary purpose.

The point should be made that to act “in the spirit of public service” at least implies that one will seek to promote or preserve the public interest. A person who claimed to move in a spirit of public service while harming the public interest could be open to the charge of insincerity or of failing to comprehend what his or her professional commitments really amounted to in practice.

In August of 1993, the Australian Council of Professions issued a discussion paper, Professional Services, Responsibility and Competition Policy. Significantly, a press release about this paper was issued under the title, In The Public Interest. Both the paper and release sought to distinguish a profession from “more commercially minded occupational associations”. As opposed to others, professional practitioners:

... must at all times place the responsibility for the welfare, health and safety of the community before their responsibility to the profession, to sectional or private interests, or to other members of the profession.

If the idea of a profession is to have any significance, then it must hinge on this notion that professionals make a bargain with society in which they promise conscientiously to serve the public interest – even if to do so may, at times, be at their own expense. That is, to be a professional is to face the very real prospect of having to act with moral courage.

Q: When does your concept of 'professionalism' become important?

While not wanting to suggest that corporate secretaries are required to be especially ethical or courageous they do have the advantage of belonging to a professional association that can support them, if it is minded to do so. Individuals acting alone may feel unable to raise their concerns for a variety of reasons which might include: a lack of access to relevant information, concern about continued employment prospects and so on.

Corporate secretaries enjoy peer support, which should be directed to helping them to discharge professional obligations – especially those relating to integrity, an orientation towards the truth and a commitment to the provision of independent advice.

Let me be clear, I am not suggesting that corporate secretaries ought to substitute their judgement for that of their employer on matters of policy. Instead, I am saying that corporate secretaries must not suspend their judgement in deference to those who exercise power or influence.

That is, the critical assessment by corporate secretaries should bolster a more general tradition in which professionals provide impartial advice and service to their employer. To do so is quite consistent with a more general professional obligation to discern the difference between a client's interests and wants. This is to engage in the distinctive form of 'best practice' that informs the work of members of the professions.

Q: Why not just suggest a need for 'best practice' in these areas?

Talk of 'best practice' frequently leads people to concentrate on a quasi-technical framework in which measurable standards are defined. The focus is on defining what constitutes superlative technique. But is this enough? Let me state clearly that I think it essential that people aim for technical excellence. However, to leave it at that would be to endorse the development of a lop-sided kind of practitioner who is only concerned with how best to prosecute the means to an end.

While a concern for means is important, let me suggest that the idea of 'best practice' should also encompass the development of skills, understanding and dispositions that allow for excellence in the assessment of ends. It can only be so if you accept my suggestion that corporate secretaries should play a vital and creative role in assisting organisations to exercise informed judgement.

Informed judgement should reflect on the destination as well as the means of travelling! It is important to ensure that both means and ends can be justified. How many times have we heard statements that boil down to nothing more than a claim that “the ends justify the means”?

Q: So how would you sum up?

It is possible that my discussion of this topic has enlarged the role of the company secretary well beyond what many people consider to be an acceptable boundary. In doing so, I am bound to have made life rather more complicated than most would have preferred it to be. Unfortunately, it is difficult to see how the conclusions that I have reached could have been avoided.

The world is a more complicated place for companies to negotiate. Many directors feel uncomfortable in this world and are ill-equipped to deal with an emerging paradigm of corporate governance that goes well beyond today's formal requirements.

Where else, in the company, is professional assistance to be found?

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