Ethical Intelligence in the Boardroom
In the wake of countless business scandals and corporate collapses, there has been a call for a higher standard of business ethics. Ethics are at the heart and soul of every business decision; they form the basis of the underlying culture of every company. However, the culture and ethics of a company are set by the tone at the top: the boardroom.
How can boards build a sound and sustainable culture as well as good ethical practices that will improve transparency, decrease the risk of fraud, and reduce the likelihood of reputation damage? The key focus should be to institute practices that outline the expectation of appropriate conduct, and to put in place controls that ensure these standards are being met.
Five good governance practices to put in place to ensure good oversight:
1. Code of Conduct
A Code of Conduct drives the board and each director to focus on areas of ethical risk, provide guidance to directors to help them recognize and deal with ethical issues, provide mechanisms to report unethical conduct, and ultimately helps foster a culture of honesty and accountability. It is the responsibility of each director to comply with the letter and spirit of this Code. It should be reviewed and signed off on annually. The Code of Conduct should cover off areas such as:
• Director responsibilities
• Conflicts of interest
• Corporate opportunities
• Confidentiality
• Compliance with laws, rules and regulations, fair dealing
• Reporting of illegal or unethical behaviour
• Compliance procedures and waivers
Two samples of a model code of conduct for corporate directors can be found at the links below:
• https://www.mpac.ca/sites/default/files/imce/pdf/CodeOfConduct.pdf
2. Whistleblower Policy & Program
Whistleblower policies are a mechanism whereby employees on the frontlines are able to report legal and ethical business concerns that management, as well as the board, may not have view of. Whistleblower policies should afford employees a sense of anonymity that encourage them to come forward with their observations, without the fear of retaliation. These policies when executed properly, protects the business through early detection of wrongdoing – however many of these programs falter, with the onus falling on the board. Whistleblower programs that fail to foster a sense of support for employees or breach their sense of confidentiality create a culture plagued by a sense of neglect, fear of retaliation, and resentment.
It is the responsibility of the board to ensure bad news has the opportunity to rise to the top through the implementation and exercise of Whistleblower policies that are anonymous, independent, rewarded and remedied. An effective board should insist on the facilitation of proper channels that goes directly to them.
3. Ongoing Board Renewal Process
Board renewal, the regular review of a board’s composition, is an ongoing process instituted to ensure the maintenance of good governance practices and to promote relevance in a changing business environment. The Corporate Governance & Nominating Committee (CGNC) of the board is responsible for regularly reviewing the composition of the board and identifying new board candidates. Newly appointed board members are valued for their ability to see things with a fresh set of eyes and a perspective that long-standing board members may not have to due to long director tenure. Setting term/age limits for directors is an important facet of the consistent re-evaluation of a board’s effectiveness is already being done in several countries. Having a diverse strategy and ongoing board renewal process creates diversity of thought which facilitates critical thinking and avoids group-think. You can read more on why a diverse board makes good business sense in my earlier blog post here.
4. Review your Diversity & Inclusion Policy and Practices
Most organizations have begun implementing diversity and inclusion policies and even include diversity related questions in job applications. However, it’s important that these initiatives reach beyond a pre-hire questionnaire or a legalistic human resource policy.
Boards should strive to ensure that they are adequately iterating their interest in maintaining an inclusive culture through succinct and related education about LGBT, ageism, ethical & and gender matters. There should be communication regarding appropriate workplace interactions, and implementation of training on unconscious bias. These efforts should be further elevated through diversity and inclusion benchmarking.
A great example of a well-drafted diversity and inclusion policy comes from Ontario Power Generation (OPG), whereby the policy statement reads:
“OPG embraces diversity in its broadest sense – a mix of talents, perspectives, backgrounds and experiences that increase our collective capability. OPG believes strongly in developing a culture of inclusion in which everyone is treated fairly and respectfully and each member is valued as an integral part of the team. OPG embraces, respects, accepts and values differences among all employees and directors.
Diversity is an integral part of our business practice and the constituency of the OPG Board of Directors. The Board considers diversity essential in attracting qualified directors and maintaining a highly effective Board. The Board, its Committees and their associated meetings are organized and presided to create an inclusive environment to engage all Board members.”
You can read the full policy here.
5. Internal Controls/Review of Culture & Integrity
On an annual basis, have internal audit test the controls for culture and integrity (including complaints, reaction time, investigation protocols, record keeping and non-retaliation) and report directly to the board on their findings.
Also important is to ensure that unbiased information is being filtered through to the board level. This includes implementing controls such as regularly removing management from boardrooms in order to create a safe space such that directors can share transparent views, as well as seeking out disaffirming feedback regarding company culture and executives. These steps should be complimented through the receipt of untampered employee feedback, collected through regular surveys of employee morale, exit interview results, and a comparison of staff turnover and litigation rates against industry peers.