Ethics in Corporate Governance: “Walking the Talk”

If it’s true you can’t legislate morality – and all evidence, including but certainly not limited to corporate malfeasance such as the Enron and Worldcom scandals or the questionable corporate behavior of reckless risk-taking to maximize short-term profits and compensation (under “heads I win, tails you lose” compensation structures that left shareholders with the short stick) that contributed to the financial crisis, supports this hypothesis – why do companies bother with ethics policies?

I know Section 406 of Sarbanes-Oxley requires publicly traded companies to disclose whether they have ethics policies and whether their executives are bound by them. But Enron had a beautiful 64-page ethics policy, suitable for framing – for all the good it did them. So what’s the big deal?

Ten years ago, I wrote the following in Issue 5, Volume 1 of The Bulletin, “The Code of Conduct – Laying a Cornerstone for Effective Governance”:

Executives often talk of change being the one constant of today’s business environment. Adaptive cultures are most likely to sustain superior performance over time because they are best prepared to anticipate and adjust effectively to change … However, if there is one constant for success in a rapidly changing global marketplace, it is the immutable bedrock of an unwavering commitment to ethical and responsible business behavior.

Business ethics are the principles of conduct governing an organization and the individuals within it. These principles are defined through the day-to-day behaviors of managers and employees, creating a culture in which everyone is able to observe management’s actions and reactions in response to events. These observations lead, in turn, to an understanding of how individuals throughout the organization are expected to behave in similar situations.

A formal, written code of conduct transforms ethical behavior into something more tangible and real in an organization.

While a code of conduct is considered a best practice among many companies, there are certain legal protections afforded to companies that can show an employee caught breaking the law was a “rogue” acting counter to the company’s written policies and procedures. However, companies with a superficial “check-the-box” ethics policy may not have such protections and may remain prone to ethical lapses. Despite SOX and a growing list of regulations attempting to legislate morality, the media remains full of stories of corporate misbehavior.

It is interesting that less than one in five people believe business and government leaders can be trusted to make ethical and moral decisions, according to the 2013 Edelman Trust Barometer, a survey of more than 30,000 people in 26 countries. Such a finding points to this issue being a global one.

A company’s culture begins with the tone at the top. It is the responsibility of the CEO and board of directors to set the example. Over time, we’ve expanded the concept of “tone at the top” to the “tone of the organization,” which is intended to describe the collective impact of the tone at the top, tone in the middle and tone at the bottom on risk management, compliance and responsible business behavior.

While tone at the top is important and provides a vital foundation, the reality is that when leaders communicate the organization’s vision, mission, core values and commitment to appropriate ethical behavior, what really drives behavior is what the organization’s employees see and hear every day from the managers to whom they report. Tone of the organization is the first line of defense because of the significant influence it has on the organization’s risk culture.

According to The IIA Research Foundation’s study, Audit Committee Effectiveness: What Works Best – 4th Edition, culture and compliance are the “soul of accountability” and tone at the top is about “creating a culture where everyone feels responsible for doing the right thing.”

One way to do that is through the adoption and promulgation of core values. The Institute for Global Ethics (IGE), a nonprofit dedicated to the promotion of ethical values, has identified five core ethical values common to many cultures, regardless of race, age, religious affiliation, gender or nationality. They are:

  • Honesty
  • Accountability
  • Fair play
  • Respect for others
  • Compassion

Although these values are universal, the real value of assessing whether they are baked into your organization is the self-examination inherent in coming up with the core values that best reflect your culture and values. For these values to be accepted by the rank and file, they must be authentic. The best gauge of authenticity occurs when executive management and unit and functional leaders practice these values day to day.

Any set of core values is not a cure-all for greed and corruption. But governance by sincerely held principles, and the acculturation of those principles throughout the organization, can support the company’s ethics policy and work to the greater good of shareholders. Conversely, if an ethics policy is not aligned with a company’s principles and practices, it won’t be worth the paper on which it’s printed.

Jim

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