Spotlight

Ethics and the role of the board

Dec 01, 2017
Directors must understand the vital role of ethics in establishing the values and behavioural DNA of a board and its organisation.

The ethics and values of an organisation are generally formed and espoused by the founders. They can be based on a set of strong beliefs about a particular issue such as ethical beauty products, climate change or a particular way of doing business.

Regardless of the starting point, these ethics and associated values will be formative in how an organisation evolves and is run. Ethics and values cannot be painted onto an organisation, however.

Ethics 

In a business context, ethics involves the exercise of values – such as trust and integrity – which influence and determine the day-to-day behaviours and actions of a company. Embedded values and ethical behaviours are hard-won company assets built up over time that can easily be destroyed by actions that are, or perceived to be, unethical.

Ethical behaviour instils trust and empathy. It also enhances reputation, which can in turn improve income by attracting more customers who are attracted by the associated brand. It should in turn mean greater financial sustainability and finally, while good behaviour engenders more good behaviour, the opposite is also true.

If you are considering a directorship, whether as a non-executive or an executive director, it is important that you have a good understanding of the ethics and values of a company. If you work in the company, these should be self-evident. If not, it needs to be part of your due diligence. This process can include talking to current and former board members and senior executives. If you would have a difficulty in supporting these ethics and values, then you may want to reconsider whether becoming a board member is right for you.

Looking at the same issue from the company’s perspective, during the recruitment process board members should evaluate closely the ethics and values of any potential director against those of the company. The induction and ongoing professional development process for all board members, as well as staff, presents a good opportunity to introduce and reinforce ethics and discuss the company’s values – in other words, what it feels strongly about.

Ethics and the role of the board

Once you have joined the board or are an existing board member, part of your role will be to ensure that ethics are embedded and exercised in the organisation. Company directors are responsible for setting the ethical standards and values for their organisation, and this is the most valuable asset directors can cultivate within an organisation. If these standards are embedded in the organisation, they will form the bedrock for the company’s future sustainability. 

The process of embedding ethics and values is not an easy task, as ethics and values tend to be intangible. Yet, they must be made tangible to staff and customers for them to be real. Therefore, ethical standards and the associated behaviours must be led, developed and disseminated by the board. The board – both as a collective and as individuals – set the ethical tone from the top of the company and must ensure that it becomes part of the DNA of the company. Ethics, values and the appropriate behaviours should permeate every pore of an organisation and be reflected in its mission, vision and strategy. In this context the board’s responsibilities include:
  • Developing, agreeing and documenting the ethical and values framework of the company;
  • Living these values as the leaders of the company;
  • Supporting ethics programmes for staff at induction and on an ongoing basis; and
  • Ensuring that the company lives up to its stated ethical values through appropriate monitoring mechanisms.

Ethics in practice

The larger the company, the more difficult it is to maintain consistency in the application of values and ethical behaviour. It is unlikely that all staff can be relied upon to react in the same way, particularly where there is significant cultural diversity in the countries in which a company operates. This is why a code of ethics is essential. A well-written code, consistently applied, will minimise uncertainty and raise awareness of ethical issues in the company. The code should help to operationalise ethics and values by developing an associated set of behaviours that will help guide the actions of staff in situations where they may face ethical challenges.

For example, a retailer selling clothing in Ireland might have questions over the type of labour and the employment conditions used in developing countries to produce their goods. Similarly, if a company is seen to exploit tax planning to the limit, even though it may be permissible within the tax codes, it may impact on the values and the reputation of the company.

Ultimately, good ethical practice should improve transparency, decrease the risk of fraud and reduce the likelihood of reputational damage.

A code of ethics

A company’s ethics programme should contain the following elements:

Code of ethics

  • A code of ethics is a written set of guidelines issued by a company to its management and staff to help them conduct their behaviour and actions in accordance with its values and ethical standards.
  • The communication of the code of ethics is important. It should be included in the induction process for new staff and in staff handbooks. It should also be available online as a staff resource.

Training

  • Training in ethical behaviour ensures that all directors and employees know what is expected of them. It helps instil ethics in the culture of the company.
  • Companies should have a person responsible for ethics. For instance, Coca-Cola’s code of ethics is administered by an Ethics & Compliance Committee composed of a cross-functional senior management team. It oversees all ethics and compliance programmes and determines code violations and discipline. The Ethics & Compliance Office has operational responsibility for education, consultation, monitoring and assessment related to the code of conduct.

A means to report breaches of the code of ethics

  • Companies should provide the means for staff and others to raise ethical concerns.
  • Companies should encourage good faith reporting (‘whistle-blowing’) and foster a culture whereby they are protected.

Rewarding those who ‘live the ethical culture’

  • Ethical behaviour should be recognised and rewarded. Adherence to the company’s code of ethics should be part of the performance review process for all staff, including directors.
  • Those who breach the code of ethics should face appropriate action.
  • The requirement to follow and conform to the code of ethics should be included in employees’ contracts and directors’ service agreements.

Monitoring and reporting

  • Companies should monitor the impact of their ethics programme and report the findings internally with an improvement plan to address areas of concern.
  • Many companies issue corporate social responsibility (CSR) reports annually, which cover ethics and values.

Summary

The board of directors is responsible for setting ethical standards and values, and ensuring that they are embedded in – and become part of the DNA of – their organisation. An ethical business should be a more sustainable business.

David W. Duffy is author of A Practical Guide for Company Directors and founder of www.governance-online.com.