Corporate governance: why the board must lead on ethics
Business ethics are good for company performance, but the tone has to be set from the top
Much is written about the role, indeed duty, of the board in setting the ethical values of the organisation. A board is responsible for determining, articulating and communicating the values and standards of the business, and for ensuring that the policies, procedures and controls in place act to embed, rather than hinder, ethical values throughout the business.
But can boards demonstrate that they are committed to ethical standards and their application to the way they govern and conduct themselves?
The business case for business ethics has been well demonstrated through the costs and impacts of the repeated high profile cases of corporate greed and misconduct. Often those integrity failures are a result of senior individuals crossing ethical boundaries as well as ignoring or circumventing the rules set out in law.
In today’s environment, stakeholders have high expectations that companies should be run in accordance with good corporate governance practices – it is the directors which bear ultimate responsibility for the business. So if corporate governance lies at the very heart of the way businesses are run, it is imperative that ethical values should be part of what makes those hearts beat.
The right choices
Questions of ethics, or the “right way to run a business”, are inherent in all aspects of corporate governance and in every board decision and action. These include the discretionary decisions a board takes to deliver on its duties as set down in law, and demanded by shareholders and other stakeholders. And the choices a board makes within the core business strategies that they pursue and the way they direct the business as a whole.
Boards take decisions which have far-reaching consequences and directly affect the lives of their employees and other stakeholders, a recent example being tax avoidance.
But business ethics also includes the way the board conducts itself and the way board members choose to behave in carrying out their role. The culture of an organisation will be strongly influenced by the nature as well as the quality of the leadership shown by the board.
It should go without saying that members of boards should have personal integrity, as well as being champions of the company’s values.
Principles and terminology
The imperative for ethical behaviours and practices within the boardroom has arguably never been more important. But new research from the Institute for Business Ethics – A Review of the Ethical Aspects of Corporate Governance Regulation and Guidance in the EU – has found that explicit reference to ethical principles and terminology has generally been absent from corporate governance guidance and regulation both at the EU level and within most member states.
Although the research found similarities in general corporate governance principles and requirements, a comparison of explicit ethics drivers was not actually possible as they were not evident. This lack of explicit engagement and encouragement, if not requirement, for ethical standards would seem to undermine the imperative for integrity, honesty and accountability in the boardroom.
The continual expression, communication and demonstration of ethical values and practice are essential if a board wishes its organisation to operate in line with its core values, and to enjoy the benefits which doing business ethically can bring. At every opportunity, all directors should be encouraged to communicate the values and the importance of their application to the company.
Communication is not just about words: “walking the talk” is important too. It means applying the code of ethics to directors’ behaviour, as well as staff conduct. How does the board handle conflicts of interests? Is there diversity in the board? Is remuneration and recruitment fair and transparent?
Smart corporate practice
Attention to corporate ethics is increasingly a core feature of boardroom agendas in practice. Leading edge companies recognise business ethics, sustainability and social responsibility as characterising the right way to run a business as well as being essential for long term success.
But boards are still lagging behind when it comes to examining their own ethics. The apparent lack of explicit engagement at EU level with ethical principles in corporate governance guidance means there is limited requirement, or indeed encouragement, for boards to operate with high ethical standards.
For some key governance issues that boards have been expected to address, the driver is most often given in terms of what is “good for business” rather than engagement with any moral imperative.
This is even though what is generally viewed as unethical behaviour, sometimes at the most senior levels, has led to business failure on numerous occasions. The link has yet to be unequivocally made in corporate governance discourse that what is ethical is very often good for business, or at least that what is unethical generally impacts negatively on business.
But for a company to be truly ethical, board members must also ensure that the board itself is governed with ethics in its mindset and at its heart.
Nicole Dando is head of projects at the Institute of Business Ethics.
A Review of the Ethical Aspects of Corporate Governance Regulation and Guidance in the EU is available as a free download here.