A poor regulatory framework will not expose inappropriate boardroom behaviour, but will increased regulation expose lack of ethics? Will rogue directors come to light before it’s too late if regulations and reporting demands are increased? And anyway, how do we define sound ethical practice?
And as one conference speaker explained, criminal practice in the corporate world in Tasmania is seen as sharp practice in Melbourne, and good business in Sydney. How might we view it in say Auckland or Wellington?
So, can we establish global standards? Will ethical investors and consumers encourage global standards to emerge? What criteria can be used for the “fit and proper” test?
And what are ethics anyway?
The challenge for directors is to find balance between compliance and performance, or, process and enterprise within an ethical framework. The culture in the boardroom reflects the culture in our community.
So, more questions. How do we build this climate in our community, respect for the intent of the law while focusing on building profitable sustainable company? How do we avoid focusing so much on reporting the financial results that we lose sight of growing the enterprise or resort to unethical behaviour to manipulate results?
A corporate governance culture of trust, integrity, and intellectual honesty ensures the common law duties of good faith, diligence, care and skill are paramount. This culture will only be created in boardroom if it reflects the wider aspirations of society and the standards of the business community generally.
The law sets standards about personal and corporate liability. How, then, do we ensure that we continue at all times to be an agent to those we represent and to those who have committed their wealth to us, with the expectation that we will act wisely and honestly in the best interests of growing the business?
We need three-pronged approach:
*A framework of sensible, practical, fair legislation and regulatory frameworks within community which not only respects the letter of the law but also its intent.
*Directors who place integrity and honesty above personal gain.
*A Code of Ethics in each boardroom tailored to each unique entity providing framework which reflects the local legislation and the moral commitment of the individuals.
What are ethics?
Ethical behaviour is what we do because it is “right”; it is an inner sense of integrity and good judgement. But each person’s inner sense of right and wrong varies. Each director comes from different background, different schooling, different life experience, often different religion and, even different city.
A board of directors should articulate set of values for their circumstances. Values will vary in emphasis in each sector. For instance, the code of ethics for real estate agents might be less stringent than bank’s code of ethics. These values will, inevitably, reflect the wider values of the community at large. Ethics are principles and are articulated through many avenues to work harmoniously together.
The moral principles on which boardroom is based must mirror the values of the business community in which the company operates. The values will be reflected in the legislation, codes of conduct, professional standards and in the culture applied to ensure compliance. The wider purpose is to foster sense of competency and create investor confidence whether they are shareholders through stock exchange or family members from small community.
How to manage unethical behaviour?
But what happens when individuals encounter violations of governmental regulations, accounting irregularities, fraud, falsification or destruction of company records, workplace violence, substance abuse, discrimination, sexual harassment, undeclared conflicts of interest, or release of proprietary information?
Increasingly companies are setting up processes to protect whistle blowers and encourage those with information to come forward. Options include hotline with third party or access to the chairman of the audit committee.
The board sets the ‘tone at the top’. In the same way society sets values through sensible, fair legislation, board of directors must set the ‘rules’ through sound policies. I have worked with boards where there has been misuse of credit cards and misunderstandings about expense claims – just few dollars at first but then rapidly growing with no budgetary oversight. Where was the code of ethics? Who set the moral rules? Who approved the chairman’s expenses? Was there clear business expenditure policy? Were the delegations of authority understood?
Boards must nurture culture of respect, trust, and intellectual honesty. Directors must be diligent, aware of their duties, act in good faith and at all times in the interests of the company. The flow of information must be timely and accurate. Directors must have sufficient facts before them to make rational decisions. Within culture of trust, conflicts of interest are managed. Social responsibility is an integral part of all decision making. Sound stewardship of the company’s assets is the underlying theme of all decision making. Boardroom confidentiality and collective responsibility are basic rules. The board has collective authority but in the end, directors are individually responsible and liable.
Legislation and regulations
The regulatory framework establishes the values on which each boardroom operates. Excessive or outdated regulation and law potentially encourages disregard for the law. But will more legislation and regulations prevent corporate fraud, conflict of interest, and poor business judgement? And how do we find the balance?
Corporate legislation and regulations challenge those with potential to be unethical.
But directors might divert their focus from building sustainable, profitable company to conformance and compliance to avoid penalties. Imagine the intellectual energy that Enron’s financial wizards generated during their creation of the complicated web of financial transactions, ensuring compliance with some 428 financial regulations. If their focus had been on growing sustainable company, Enron might be model of corporate success today.
America’s Sarbanes-Oxley Act is not the complete answer and legal experts claim that it reflects the speed of document drafted ‘overnight’, so to speak. There is, however, consensus that the overriding objective was correct. US investor confidence was so low that it needed some reassurance. Would the public accept only principles approach without complementary legislation?
However, does the law merely create challenge to those with poor judgement? The values, culture, political sensitivity and management style of directors is the key to effective governance. Legislation can’t replace the basic requirement for strong business ethics, intellectual honesty and integrity in the boardroom.
Legislation does, however, create the culture in society. Legislative intent is to provide sound ground rules. But there are many choices about how to get the best possible climate in the community for high quality moral standards in the boardroom: – more law or less law – highly prescriptive law or less prescriptive law.
If directors are constantly preoccupied with compliance with restrictive and outdated law, and with excessive regulations, it creates negative attitude to law. It is important to set culture that ensures citizens respect not only the letter of the law but also the moral principle and intent behind it.
Codes of Best Practice
Codes of ethics or conduct complement the legislation of the land. The code can be for internal or external purposes.
It can establish agreement about standards of morally acceptable behaviour within an organisation or provide guidance in moral decision-making. It can also promote organisational integration and coordination.
A sound code of ethics sends message to external stakeholders that can bolster their tru
