October 8, 2013 Lessons on Ethical Corporate Governance
Ethical corporate governance is good for business, but it requires more than saying the right thing.
Every major company publicly states that they embrace an ethical business policy and they will inevitably have all the policies and procedures to support this. However, this if often not enough, if the culture at the firm is not right.
A failure to act ethically can lead to some dramatic consequences from investors, from the regulator and from law enforcement. Ethical governance can also lead to a competitive advantage by motivating employees and building trust with customers and stakeholders.
We recently attended a talk by Lord David Gold on ethical corporate governance and his experiences. Lord Gold has a history of helping companies who have allegedly failed to live up to an ethical corporate governance standard, including:
- being appointed by the US department of Justice as Corporate Monitor of BAE Systems plc to watch over their governance systems;
- providing governance advice to Rolls-Royce plc, which had previously faced allegations of bribery; and
- reviewing the practices of Serco following claims by the UK government that they had committed fraud on two government contracts.
This history of advising companies in trouble, has given him an insight on some of those things that were missing from their governance framework. Here we set out the six key lessons that he highlighted as well as his overriding theme of a mutuality of respect.
Six Lessons for Ethical Corporate Governance
- Leadership from the top: This is such a fundamental point that it is often assumed to be a given. However, it is more than just saying the right things. Even if all the relevant policies and procedures are in place, how management act is crucial.
The senior management need to act in a way that makes clear that the bottom line is not the only thing that matters. If the middle management and employees believe that the leaders of a business value results above all else (regardless of how they are achieved), this will be reflected in the way the business operates.
- Punishments for non-compliance: A key indicator as to how ethical behaviour is valued at an organisation is how transgressions are punished.
If an individual commits a serious ethical breach, then the nature of their punishment will be taken as a guide by the rest of the business. If their punishment is light, then the rest of the business will inevitably adjust accordingly.
- Training: All major businesses have ethical and anti-corruption training, often delivered through online systems. Although online training is a useful tool it can be generic. Face-to-face training and tailoring the training to the individual, to bring home the message, are equally important in embedding a strong ethical culture.
A good training programme will also not only highlight the criminal and reputational risks to the individual and the business, but it will help to highlight the competitive advantage that can be gained from being seen to operate ethically.
- Remuneration: Rewarding ethical behaviour is vital to provide the ‘carrot’ to promote an ethical behaviour amongst staff. This also means that businesses should consider not rewarding individuals who achieve results but do not fit into the desired culture of the firm.
- Prevention: Any organisation needs to have robust and effective prevention tools to identify and prevent unethical behaviour. Two key areas are the Financial Control function and Internal Audit. These areas need to be empowered to take a holistic approach to the role, in order to identify when things are going wrong.
- Identification: Strong identification measures also help to ensure a good ethical governance regime. This will generally involve (i) a monitored and confidential whistle blowing line; and (ii) ethics officers embedded in the business that hold the trust and confidence of their fellow employees.
Mutuality of Respect
A strong ethical corporate governance system is important to a business, but a business cannot run on compliance alone. Every business needs to enjoy commercial success or it will not be around for long. Commercial success can also help embed an ethical governance system as it will reduce the desire to gain success through corrupt practices.
There therefore needs to be a mutuality of respect between the compliance functions and the commercial side of the business, with both sides understanding the importance of the other. Unless or until these functions are working together, it will be very difficult to operate effectively and ethically.