Ethics and Governance

Ethics and Governance

It can take several years and a lot of hard work to build an effective board. David W. Duffy outlines key measures that can be taken to improve its effectiveness. It can take several years to build a fit-for-purpose board that has the leadership and dynamism to support the executive team. The most important element in any governance structure is the Nominations or Talent Acquisition Committee. The purpose of this committee is to help the board make sound business decisions by appointing the right board members. If this committee does not do its job, then the board and the organisation risk stagnating through the lack of new ideas or no challenges to the status quo. New appointments should be strategic and not tactical; they must bring unique skills and experience to the company that will have a real and tangible impact at board level.  This could include the world of digital, geopolitical insight, capital raising, or knowledge of a particular sector, such as offshore life assurance. Board appointments that are rushed are not a good sign of good corporate governance; each appointment should be considered carefully before being made. So, assuming the board is populated with the right talent, here are a few examples of other measures that can be taken to improve its effectiveness: Conduct regular external board evaluations to get an external perspective on the effectiveness of the board. Conduct 360 reviews of the board directors. Make sure that the information provided by the executives is assessed annually to ensure the board can do its job efficiently. Have an annual work plan for the board and for all its committees. This will help set the agenda for the year, and will also ensure the board spends enough time on the future by delegating as much as possible to its committees. Hold an away day at least once a year to reflect on the board’s strategy in some depth and to focus on specific issues, such as looming regulation or competition issues. This also provides an opportunity for the directors to get to know one another other better. Invest in the capability of the board through a professional development programme. The board evaluation may well indicate what the directors might like in terms of development, but it is helpful to also ask them. Topics will depend on the company, but the programme could focus on new regulation and compliance requirements, sustainability, diversity and inclusion, etc. David W Duffy FCA is the Founder and CEO of The Governance Company and the author of A Practical Guide to Corporate Governance, published by Chartered Accountants Ireland.

Jan 31, 2020
News

How can a board set the example rather than becoming one? Ros O’Shea gives a five-step approach to creating an ethical board. “Where was the board?!” is the question often asked in the immediate aftermath of corporate misconduct. Stakeholders, quite rightly, expect boards to ensure businesses are run ethically. Yet, sometimes boards (and usually their companies in turn) fail dismally in this crucial aspect of their role. What can a board do to ensure the highest levels of probity in their organisations? This five-step approach can help. Ensure the ethical infrastructure is in place From a code of conduct to ethics training, speak up channels, ethical due diligence procedures and incentives programmes that reward the 'how' and the 'what', directors must ensure the appropriate infrastructure is in place in their organisations to enable and foster a culture of integrity. This is akin to laying down an ethical 'base layer'. Appoint the right CEO In leading that culture, the CEO is key. On appointment, they are bestowed with the organisation’s most precious asset – its reputation – and must be responsible for its safekeeping. It is the most important decision the board makes and demands commensurate investment in a robust process to recruit the right leader. Act ethically It is rare for a board to deliberately endorse an illegal act, but we know there can be a vast difference between decisions that are legal and those that are right. Decisions are usually right when a director is comfortable being personally accountable for their part in it, especially if it would be made known to their family on the front page of the local newspaper. Directors would do well to assess all decisions through that lens and determine whether they want to simply meet a bar, raise the bar or – better – set the bar in terms of moral courage. Lead by example In order to effectively set the tone from the top, the board should be a microcosm of the organisation’s desired culture. Espoused values, such as respect and openness, should underpin board interactions and encourage constructive debate. IQ at this level is a given, but emotional intelligence (EQ) differentiates high-performing directors and their boards and should be a prized quality in director recruitment. Monitor culture Finally, directors must know that only so much governance can be done within the confines of the boardroom; they need to experience first-hand the organisation’s “mood music”. This provides the board with the holistic assurance it needs that the desired culture is truly living and breathing across the organisation. By following these five steps, the board will focus on doing the right things and asking the right questions, which will ultimately lead to the right outcomes. Briefly, that is the board’s role in relation to ethics: to stand squarely behind their chosen CEO and collectively set the tone from the top while providing independent oversight on the organisation’s ethical infrastructure and culture. Ros O’Shea is the founding partner of Acorn Governance Solutions.

Jan 31, 2020
News

With so many disruptive technologies available, is it possible for to directors keep up with the needs of the business? Kieran Moynihan explains how, with the right NEDs, a company can thrive in a constantly evolving digital world. As disruptive technologies such as artificial intelligence, robotic process automation and emerging payment technologies grow in adoption, many boards are struggling to understand how these will impact customers, market segment and the competitive landscape. Crucially, how can they incorporate these technologies into their overall strategy and business models? This relentless wave of new technology disruption is increasingly upsetting the traditional hierarchy of markets by lowering the barrier to entry for new competitors. Companies need to adapt to harness the opportunities and benefits of these disruptive technologies otherwise it risks being left behind irrespective of its traditional market position. Often, the reason behind this struggle to adapt to technological disruptions is that there is a significant lack of technology expertise among non-executive directors (NEDs). This is further compounded by a serious age diversity problem in boards where, across Ireland and the UK, the average age of many boards is late 50s to early 60s. The vast majority of these NEDs indicate that areas such as cyber-security are problematic for them. This, in turn, impacts their ability to provide high-quality, robust challenge, debate and oversight of the CEO and executive team in terms of how a company incorporates these disruptive technologies into its strategy. In marked contrast, younger NEDs in their 30s and 40s tend to be very comfortable in the digital and disruptive technology landscape, have a strong understanding of how customers’ requirements are evolving and can genuinely challenge and support the CEO and executive team in these areas. In most boards, the traditional approach to selecting NEDs has been focused on a majority of generalists with significant executive experience, and a number of sector specialists, which has led to a predominance of financial and general business skills around the board table. However, as both the pace and complexity of emerging disruptive technologies has significantly increased, this traditional model is breaking down and many of the sector-specialist NEDs are finding it challenging to keep up with the pace of change. Many CEOs and executive teams are struggling to make big calls around technology and business model choices. There is a growing trend of board chairs and CEOs who realise that, in order to thrive, the board team needs to be refreshed with the addition of NEDs who have advanced technology expertise. They will be able to provide ample support to both the overall board team and CEO/executive team, thereby strengthening the ability of the company to embrace disruptive technologies, understand the changing needs of their customers and position themselves for sustainable long-term success. Kieran Moynihan is the Managing Partner of Board Excellence.

Jan 31, 2020
Ethics and Governance

Boards increasingly need to show how they measure their organisation’s culture, but the key information is likely already available within the business, writes Ros O’Shea. The South Sea Islanders have a word, “mokita”, which translates as “the truth that everyone knows, but nobody speaks”. Other notable definitions of culture include “a system of beliefs, shared values and behavioural norms”, “the way to do things around here” or even the “mood music” or “resting heart-rate” of an organisation. Whatever the definition, stakeholders, still shaken by a litany of corporate scandals including endemic ethical failures in financial markets, now recognise that, as Peter Drucker said, culture does indeed eat strategy for breakfast – and arguably for lunch and dinner too. Their demands have led to concerted efforts in recent years to rebuild trust and restore integrity to the heart of the enterprise. Figure 1 highlights some of these welcome developments, which go way beyond extending the rule book or adopting a tick-the-box approach to compliance. It seems everyone has seemingly landed on the same page, which says: you can have all the rules in the world but there is no substitute for character. Much has been written already about how to cultivate character and foster a values-based culture. Indeed, Chartered Accountants Ireland published my book on the topic, Leading with Integrity, in 2016 and has issued several related guides and research papers since. As organisations seek to embed cultural change, the question everyone is now grappling with is: how do you measure it? How can those charged with governance determine if the tone from the top is being cascaded through the ‘muddle in the middle’ and reflected via the ‘echo from the bottom’? Is it possible, with any degree of accuracy, to properly calibrate an organisation’s mood music or gauge its steady-state operating rhythm?  The answer is yes. My ‘5 Organisational Culture Caps’ (5OCC) approach aims to do just that. Loosely based on Edward de Bono’s ‘Six Thinking Hats’ system (where coloured hats represent different modes of thinking), with 5OCC, each cap is assigned to one of five different stakeholders. By donning each cap in turn and thinking about culture from each of these perspectives, a holistic view is developed of how your espoused values align with how your organisation behaves towards these key constituencies in practice. Four caps are pre-assigned – your customers, staff, shareholders and community all deserve their own headgear. You get to pick who wears the last cap, and your choice is likely to be heavily influenced by the sector in which you operate. For example, financial services firms may well pick the regulator; key vendors may be a valid choice for those downstream in the supply chain; whereas for other organisations, agents or brokers, or other business partners on whom they rely to deliver products or services, may get to wear a cap. Once you determine the full suite of stakeholders, the next step is to select key metrics that best capture their unique expectations of your organisation’s culture. Let’s don each cap in turn. The customer Arguably the single best way to actively test the consistency of stated values with the customer experience to attempt to buy the product or the service. Or you could try to make a complaint and follow what happens. Other key cultural indicators from the customer perspective include: Customer surveys; Net promoter scores; Complaints statistics; Feedback from customer focus groups; Social media and press coverage; Litigation and claims; and Awards and ratings. The staff Here, staff is defined in its broadest sense (i.e. from the boardroom to front-line employees). Again, boards should recognise that only so much governing can be done within the confines of the boardroom, and one of the most effective means of assessing the organisation’s tempo and temperament is to get out and about and engage with staff at all levels. Ideally, this should be done in informal ways and settings (such as townhalls or listening lunches, for example) so that site visits don’t become ‘state visits’. The HR department will be a deep reservoir of information to help you understand and monitor the extent to which values are truly lived across the organisation. There are many possible metrics under this heading, some of which are set out below: Staff surveys, engagement indices and culture audits; 360 reviews of senior management and board evaluation surveys; Remuneration and incentive policies; Ethics training and communication strategies, and their effectiveness; Statistics on staff turnover, absenteeism, safety and disciplinary actions; Whistleblowing and grievance reports, and relationships with unions; Diversity and inclusion data; Recruitment processes, succession plans and promotion decisions; Integrity awards or similar; and Online employee feedback (e.g. via Glassdoor and exit interview notes). The shareholder The nature and extent of shareholder engagement will very much depend on the type of organisation, and metrics will need to be calibrated accordingly. For private, charitable or state-owned firms, it may be a relatively straightforward process to monitor the strength and success of the relationship with the organisation’s owners, trustees or relevant government department – most likely by being party to regular discussions. Some of the following metrics may also be relevant and will certainly be pertinent for companies with a larger and more dispersed share register: Governance structures and board performance; Correspondence and engagement with key shareholders; The AGM experience; Internal and external audit reports; Independence and competence of risk, compliance, audit and legal personnel; Investor or analyst reports; Industry benchmarks; and Transparency and disclosures of financial and other reports. The community Here again the relevant community may be local or global, or somewhere in between, and metrics will need to be commensurate with the organisation’s scale and footprint. Particulars will differ but overall, they will aim to measure the extent to which the business is contributing to – and valued by – the communities in which it does business. Specific metrics are more elusive under this heading, but assessment of culture wearing a community cap will include discussions around: CSR activity in the community; In-house ‘green’ initiatives; CSR ratings and ESG credentials; Sustainability reporting; Progress towards committed UN Sustainable Development goals; Carbon footprint, water use and waste; and Local press coverage. A.N. Other As outlined earlier, you get to pick who wears the fifth cap. If, for example, suppliers are an important stakeholder group for you, measures such as promptness of payment, supplier audits and feedback from key vendors would be important to consider. If the regulator is to wear the cap, relevant areas of focus could include the number of fines, regulatory breaches, risk appetite exceptions, inspection reports and the general tone of correspondence. Metrics can also be devised for any other stakeholders by considering what aspects of your culture are likely to matter most to them. Such metrics may best be ascertained by directly canvassing their opinions. The most helpful aspect of the 5OCC approach is its practicality. Most, if not all, of the information required for the various measures will already exist in your organisation. It is simply a matter of collating and synthesising these valuable, but currently disparate, sources of data to provide a five-way mirror back to the organisation showing how the espoused values are truly living and breathing. There is no doubt that what gets measured gets done. Metrics matter. Boards and directors will increasingly need to prove and publish how they measure and monitor their organisation’s culture and I hope this model is a helpful aide in that endeavour. But again, we must remember that there is no substitute for character. All the KPIs in the world won’t displace the board’s most important role, which is to ensure they have the right leadership team who will do the right things for the right reasons. You can’t cap that.   Ros O’Shea FCA is an independent director and governance consultant.

Dec 03, 2019
Ethics and Governance

Níall Fitzgerald explains how to achieve consensus, do your duty, and be yourself as a charity or non-profit trustee. There is something exceptional about those who volunteer their time, skill and expertise to a board, or sub-committee, for the benefit of a cause they feel passionate about. As Nelson Mandela put it, “there can be no greater gift than that of giving one’s time and energy to help others without expecting anything in return”. But being a board or sub-committee member (trustee) for a charity or not-for-profit organisation is not without its challenges. These challenges can present themselves around the board table in the form of disagreement or frustration as you strive to get things done. People skills and leadership skills will be called on in order to listen effectively and convey concern, constructively challenge and support the ideas of other trustees in order to achieve consensus. Difficult dilemmas Achieving consensus is not always easy, especially when resource constraints (financial or otherwise) impact the organisation’s ability to realise its strategic objectives. Difficult dilemmas can be tabled at board meetings, which can present challenges for the organisation and test the core values that compelled each trustee to volunteer in the first place. A classic example involves proposals to suspend services in one area to the detriment of some beneficiaries in order to ensure continuity in another. An avalanche of conflicting priorities around the board table can result in an impasse. Challenges like these can make a trustee grateful for a good governance framework. Such a framework can provide clarity on their duties and responsibilities to the organisation, including the various stakeholders it serves. There can be comfort in understanding the policies and procedures that ensure the collation and adequate flow of accurate information from the front-line service providers (both staff and volunteers) and senior management to the board. Such information results in better decision-making that is in the best interests of the organisation as opposed to any individual or group of trustees. Such a framework will also provide a welcome format for effective and well-chaired discussion at the board, and ensure that the right level of diversity, skills and expertise are enabled to inform the decision-making process. Rule of law But what about the rule of law regarding the trustee’s duties and responsibilities? An understanding of these rules will help channel a thought process towards what is important for the organisation. A trustee does not need a law degree to understand these requirements. Rather than feel overwhelmed, it is useful to first understand the organisation (including its vision, mission and values), its legal structure (e.g. company, trust, unincorporated etc.) and the area within which it operates. This process will highlight the laws and regulations that are most relevant for consideration. Figure 1 illustrates the types of legal and regulatory duties that apply to trustees. Notice that some overlap and they have a common design to ensure that the organisation is always the focus of consideration. Being involved as a trustee can be the gift that keeps on giving for the individual and the organisation. Challenges present opportunities for trustees to exercise values, apply skills, provide expertise, assess problems and inform decisions in a different way – for example, through the lens of life-changing consequences. A good governance framework and adherence to the rule of law will provide another useful lens to guide, rather than impede, trustees towards consensus on trickier dilemmas.

Dec 03, 2019
Ethics

C-suite executives deploying 4IR technologies have a tough ethical terrain to navigate. Putting in place a policy for ethical usage of technology could benefit their businesses – and society. By Timothy Murphy, Swati Garg, Brenna Sniderman and Natasha Buckley Leaders are increasingly demonstrating that they want their organisations to do well by doing good, and with reason. Doing good can be good for business, especially in an intensifying economic, social, and political milieu that is challenging organisations to reinvent themselves as social enterprises. Deloitte Global CEO Punit Renjen’s Success Personified in the Fourth Industrial Revolution report, released at the World Economic Forum conference in Davos, Switzerland, earlier this year highlights that leaders are putting a greater focus than ever on advancing society through their technology efforts. In fact, leaders rated “societal impact” (including income inequality, diversity, and the environment) as the number one factor in assessing their organisation’s annual performance, ahead of financial performance, customer experience, and employee satisfaction. This view manifests in their actions as well – more than 73% of the surveyed organisations have developed or changed a product in the past year to generate positive societal impact through Fourth Industrial Revolution (4IR) technologies. But as organisations strive to take society forward with 4IR solutions, they are often confronted with a host of ethical issues, which can have societal as well as business ramifications. Examples of ethical “missteps” by companies abound in the media these days. One issue highlighted in the news regularly is that of data privacy, and it has left consumers understandably worried about how their data is captured, saved, and used. Another emerging threat is algorithmic bias, where biased data manifests itself in biased recommendations, but we’re yet to fully understand the ramifications of algorithmic bias. Even lack of inclusivity in technology design can negatively impact consumers, as seen in some smart city designs where people in wheelchairs are unable to access eye-level retina scanners as they require the person to be standing. These ethical issues, and others, have led to product recalls, public backlash and/or lost revenue for companies. In this technologically and ethically complex environment, organisational values matter more than ever. If leaders don’t formulate and implement policies on the ethical usage of technology, it will likely become difficult for them to navigate the Fourth Industrial Revolution. More importantly, it could inhibit innovation and financial growth at their companies. Our survey data from this year’s study reinforces the link between ethics and organisational growth (see the sidebar, “Methodology”), providing further rationale for why companies should care about ethically using 4IR technologies. The study found a positive correlation between organisations that strongly consider the ethics of 4IR technologies and company growth rates (Figure 1). For instance, in organisations that are witnessing low growth (up to 5% growth), just 27% of the respondents indicated that they are strongly considering the ethical ramifications of these technologies. By contrast, more than half (55%) of the respondents from companies growing at a rate of 10% or more are highly concerned about ethical considerations. Ethical concerns don’t always translate into action Most executives responding to our survey were concerned about ethical usage of 4IR technologies. More than 30% of the respondents strongly agreed that their organisations are highly concerned about ethical technology usage and another 50% indicated a moderate concern. Yet when it comes to action, this number dropped significantly – just 12% of the respondents strongly agreed that their companies are actively exploring related policies or already have them in place. So, what’s preventing leaders’ ethical concerns from being translated into ethically driven actions? The answer may lie in the dynamics of the C-suite. Our survey found that concern over ethically using 4IR technologies is not consistent across the organisation (Figure 2). Starting at the top of the C-suite, only 15% of CEOs and presidents expressed strong concern about ethical technology usage (considerably less than the 30% average across the C-suite). The chief information officer (CIO), a role often charged with managing these technologies, averaged only 16%. Contrast this with roles like the chief sustainability officer (CSO) and the chief operating officer (COO) who indicated strong ethical concerns at 50% and 41% respectively, and a clear disconnect emerges between the CEO/CIO’s line of thought and that of the CSO/COO. Given that reputation and social impact are critical aspects of the CSO’s role, executives in this role are more likely to care about ethics. The COO, who oversees enterprise-wide operations, is likely to be more aware of how work is executed and, therefore, have greater awareness of potential ethical issues. However, those with more influence on the 4IR strategy – the CEO and, to a lesser degree, the CIO – seem to be disproportionately swaying organisational policy. Only 12% of the organisations whose executives were surveyed have policies in place or are actively exploring the implementation of policies (tracking closer to the level of concern conveyed by the CEO and CIO) on ethical usage of technology. Extending ethical thinking across the organisation While 4IR technologies offer immense opportunities, they also bring many ethical challenges as they’re poised to transform the way we live, work and interact with each other. As a result, leaders at the helm of companies looking to benefit from these technologies need to navigate a complex ethical environment. Organisations could benefit from ensuring that proper policies are in place and are adhered to. The following steps can help leaders move forward in this direction: Set the tone at the top: if the CEO doesn’t consider ethics a priority, it will likely be difficult to get the rest of the organisation to do so. Not only should the CEO emphasise the importance of ethical considerations in the usage of technology, they should also encourage other members of the C-suite to express their concerns. The CSO and COO, by virtue of their roles, have a unique line of sight into the importance of ethics in supporting growth initiatives. This knowledge-sharing between the CSO and COO and the rest of the C-suite can empower executives in the organisation to tailor their solutions with ethics as a top-of-mind design consideration; Cultivate an ethical culture: ethics is not only an issue for C-level executives to consider, but it is also of prime importance to an entire organisation. It starts with clearly messaging ethical policies and guidelines – and leading by example – but it also includes giving your workforce a voice in the discussion. As senior executives work out strategies to integrate these technologies into every facet of the workforce, it’s important that they provide other employees with avenues to express ethical concerns about their usage; and Iterate the policy: 4IR technologies are rapidly changing and accordingly, policy too should change. Just as government regulation is trying to keep pace with autonomous vehicles and smart cities, organisations should establish constant touchpoints to ensure that their ethical policies keep pace with the rapidly changing technology environment. For CEOs and other C-level executives, integrating the ethical considerations of employees across the organisation and other stakeholders into their day-to-day operations also makes good financial sense. The organisations that set the tone at the top are the ones that are likely to be best positioned to help their businesses – and society – flourish. This article was originally published by Deloitte Insights. View the article at www.deloitte.com/insights/industry-4-0-ethics Methodology This research is an extension of the Success Personified in the Fourth Industrial Revolution report, which is based on a survey of 2,042 global executives and public sector leaders conducted by Forbes Insights in June–August 2018. Survey respondents represented 19 countries from the Americas, Asia and Europe, and came from all major industry sectors. All survey respondents were C-level executives and senior public sector leaders including CEOs/presidents, COOs, CFOs, CMOs, CIOs and CTOs. All the executives represented organisations with revenue of US$1 billion or more, with half (50.1%) coming from organisations with more than US$5 billion in revenue. 65% of the public sector leaders represented organisations and agencies with budgets of US$500 million or more.

Oct 01, 2019