Organisations often struggle to foster an ethical culture. To help you on your journey, Penelope Kenny has created a roadmap that’s suitable for both business and practice.
In the wake of the recent governance scandals, Chartered Accountants’ ethical standards are being debated in the streets and in the media. As a Chartered Accountant, I suggest that none of us can take a moral high ground. We have all seen ethical conflicts of interest appear insidiously and suddenly. We have been caught unawares by the absence of shared ethical standards. In truth, it can be difficult to be ethical.
However, as an Institute we can consider the ethical conundrums presented to us. We can ensure that, when seeping compromises and insidious conflicts of interest appear, we are able to identify problematic situations and deal with them before being compromised. Such nimbleness is a result of fine-tuning our ethical antennae through vigilance, awareness and the continuous challenge and review of our own ethics.
I recently discussed ethical dilemmas with a group of Chartered Accountants and each of us had been faced with similar situations. Some had been bruised by standing up for our beliefs; we all argued about which was the ‘right’ course of action in the circumstances presented. We were all more ethically aware as a result of the arguments and while we reached few solutions, we could show and prove that we did our best.
Let us proceed therefore, mindful of the strong caveat from Dr Pat Barker that “ethics should not be expected to emerge automatically from an increasingly complex web of rules, regulations and check lists that have themselves been derived, like Topsy, from past regulatory failures”.
Ethical standards
As the values of the board and CEO are being questioned, there is an increasing emphasis on ethical standards. The conversation on governance therefore moves to discussion of accountability and, inevitably, to the actions of the board and its individual directors. Let’s assume that business ethics, as proposed by author Manuel Velasquez, is the specialised study of moral right and wrong that concentrates on moral standards as they apply to business institutions, organisations, and behaviour”.If we agree that ethics is the discipline that examines one’s moral standards, then ethics is about the individual and collective ethical standards of the board.
Business ethics are also related to personal ethics. The ethical standards of the board of directors set the organisational tone from the top. For those of us who serve on leadership teams or boards of directors, our individual awareness of ethical business standards and how we apply those standards determines the ethical standards of the organisations. We must therefore ask: how do we ensure adherence to excellent ethical standards in our organisations?
With the objective of embedding ethics in the corporate governance framework, we can now set a framework for ethics review as part of corporate governance. Adoption and communication by the board and enforcement by the executives is part of this process. As part of the annual review of your organisation’s corporate governance framework, a section on ethics might appear as outlined in Table 1 (below), which incorporated elements from CRH’s Corporate Governance Report – Compliance and Ethics section; and the Basel Committee on Banking Supervision’s Consultative document entitled ‘Guidelines – Corporate Governance Principles for Banks’.
Conclusion
One just has to look at the well-documented issues arising in Volkswagen and Toshiba to see how corporate culture emanates from the board. The ensuing scandals resulted in high volatility and financial impact, with media coverage highlighting previous reports of corporate governance problems and related boardroom difficulties, which seemed to have remained partially hidden from stakeholders.
As CRH stated in its 2015 Corporate Governance Report, “there is never a good business reason to do the wrong thing”. With this statement in mind, the most persuasive reason to complete a proactive annual corporate governance review of your organisation’s ethical standards is to improve the corporate governance culture and communicate that culture throughout the organisation.
Ethics checklist
The board
- Has the board set and adhered to corporate values that create the expectation that all business be conducted legally and ethically?
- Has the board promoted risk awareness and conveyed the expectation that it does not support excessive risk-taking?
- Has the board ensured that appropriate steps are taken to communicate corporate values, professional standards or codes of conduct together with supporting policies?
- Has the Board outlined the consequences of unacceptable behaviour?
- Does the organisation have a code of conduct or a comparable policy that defines acceptable and unacceptable behaviours?
- Does the code of conduct make clear that employees are expected to conduct themselves ethically in addition to complying with laws, regulations and company policies?
Ethical issues arising
- Review ethical issues that came to the attention of the board during the year including conflicts of interest; gifts register; and procurement issues.
- Review how the issues were dealt with. Was the action adequate? If not, what can be done to redress this?
- Review ethical issues arising from the most recent review and/or update of the risk register including reputational issues; supplier code of conduct; donations policy; corporate social responsibility policy; ethical procurement code; and anti-fraud policy.
- Review how the issues were dealt with. Was the action adequate? If not, what can be done to redress this?
Whistleblowers legislation
- A secure channel should be available to employees to report ethical issues that concern suspected violations of company codes of practice.
- Employees should be encouraged and able to communicate confidentially and without the risk of reprisal, legitimate concerns about illegal, unethical or questionable practices.
- The organisation’s corporate values should recognise the importance of timely, frank discussion and the escalation of problems.
- There should be direct or indirect communication to the board (e.g. through an independent audit process).
- Does the board determine how, and by whom, legitimate concerns shall be investigated and addressed by an objective independent internal or external body, senior management and/or the board itself?
Board recruitment
- Has the board considered the organisation’s ethical standards when recruiting board members?
- Are ethics discussed at assessment or interview stage? Topics include an understanding of conflicts of interest; ‘fettered discretion’ under Companies Act 2014, board oversight and groupthink.
Board members’ responsibilities
- Has the board members’ handbook been issued to all board members and do they understand it? Has it been discussed at a board meeting?
- Does the handbook detail the new codification of directors’ duties in compliance with Companies Act 2014?
- Has the Office of the Director of Corporate Enforcement (ODCE) booklet, Principle Duties and Powers of Company Directors Under the Companies Act (2014), been issued?
- Has the compliance and ethics programme been integrated into standard internal audit procedures?
Disclosure to stakeholders
- Ensure that the organisation’s code of ethics and ethics review are detailed and explained in the governance statement of the annual report.
Penelope Kenny FCA is Director of ArtsGovernance and author of Corporate Governance for the Irish Arts Sector.