BOARD TALK : Doug Matheson – Boards Behaving Ethically

The general public no longer trusts or has confidence in organisational boards and senior management. There is, as consequence, growing demand for ethical governance strategies and practices in business.
There has, simultaneously, been an increased stakeholder expectation that business will continuously improve its environmental performance. Public criticism, increased government controls, and growing expectations of better financial performance and accountability have accompanied the decline in trust.
There is also increasingly strong evidence of positive correlation between sustainable business practices and enhanced financial performance. For instance, investment portfolios that take account of sustainability criteria are performing better than their conventional counterparts. These businesses benefit by attracting and retaining the best employees, from improved customer sales and loyalty and from increased supplier commitment and enhanced community relations.
Ethical and sustainable development is good business. It involves implementing and measuring ethical business practices that benefit all stakeholders to create an increased triple bottom line of financial, social and environmental performance.
Good governance is about long-term sustainable performance through enlightened board and executive leadership. The demonstration of high ethical standards is increasingly important to the long-term interests of any organisation. It speaks of the organisation’s credibility and trustworthiness, both in its day-to-day operations and longer-term needs and commitments.
A board must set an organisation’s ethical character, not only by the standards and policies it sets, but also by its actions, including the chief executive it appoints and its oversight of the organisation’s leadership and management. commitment to ethical practice and integrity is not organisationally restrictive – quite the opposite. Because public attitudes have hardened, organisations which demonstrate ethical behaviour reap positive benefits.
Ethical conduct and practice is increasingly important to how organisations relate to their customers, suppliers and the outside world. They are developing codes of conduct and ethics, specifying how management and employees should behave in their work-a-day relationships. Boards are being asked to adopt written codes of conduct as part of best practice governance.
No doubt the boards of most New Zealand businesses say they believe in and support ethical governance – many still struggle to identify specific examples of ethical leadership within their companies. Few feature business ethics front and centre on the board agenda. For most it is “nice idea” that is left to management to wrestle with.
Yet it is fundamental to good governance that ethics are both board-led strategic imperative and subject to ongoing board oversight – monitoring and review.
Establishing and maintaining high ethical and value standards is still challenge for most boards and chief executives. But it should be priority.

WHAT IS ETHICAL GOVERNANCE?
Ethical governance requires directors and management to recognise that there is more to good business practice than the next quarter’s financial bottom line. Every organisation has public responsibility. It must practise good citizenship and demonstrate and practise ethical behaviour. Social investment should be at the heart of the organisation’s strategy, plans and performance. And directors must set standards and ensure that they are met.
The important elements of ethical governance are:
1. Boards determine the organisation’s strategic direction, including the determining of its values and culture. Boards should agree ‘Statement of Purpose and Principles’ or ‘Code of Conduct’ and clearly describe the relevant ethical principles and standard required.
2. Strong and organisation-wide communication of the plans and decisions advising that, in accordance with the value framework, breaches will be considered non-performance. All job performance goals, from the chief executive down, should reflect the standards. Recruitment processes should ensure that employees embody the values of the organisation.
3. Boards should confirm through effective governance oversight that management leads culture and values that result in ethical and sustainable business practices.

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