Five Ethical Responsibilities of Corporate Boards

 Source: Pandu Adnyana

Most corporate boards have learned to act quickly when a scandal breaks. General Motors’ board is moving much more quickly to clean up the fallout from its vehicles’ ignition failures than Toyota’s board did to address its rapid acceleration problems of several years ago. It is now the rare board that doesn’t launch an independent investigation quickly when misbehavior is reported.

But the responsibility of the board to prevent scandals is more important than the responsibility to clean up the mess once it has emerged. Here most boards are still at the starting gate. Recent legislation and guidance embodied in the Federal Sentencing Guidelines clearly require the board to take a key role in preventing ethics failures before they happened. This is more complicated than calling in the outside lawyers once disaster happens.

Work we’ve done at the Markkula Center for Applied Ethics at Santa Clara University points to several key steps every board should take to get out front of ethics problems. These include:

1. Know the health of the company’s ethical culture.
Most boards or their audit committees hear pro forma reports on ethics violations and lists of calls to their hotlines. Few know anything about the culture in which these violations arise. Do these behaviors reflect widespread acceptance of improper behavior — or a few bad apples?

Does the culture embrace not just begrudging compliance but a real commitment to the interests of the company, its customers and suppliers? Do employees believe their bosses want to hear about ethical problems and will support the employee who raises one?

2. Evaluating the ethics of the business strategy.
Business models and strategies are being junked and reformulated everywhere in our modern economy. New sources of revenue are being sought; radical transformations of manufacturing and delivery systems are being implemented. Sadly, some boards are swept along by management proposals to change the nature of the business without asking critical ethics questions about the strategies.

Most boards have learned to ask whether the company is ready to monitor a China-based supply chain to insure worker safety. But few boards have discussed the ethics of tax inversions, big data mining strategies, or staffing strategies which make family life difficult.

3. Monitoring the real ethics risks in the organization.
Every organization manages financial risks, and boards pay close attention to the level of that risk. Few senior managements and even fewer boards evaluate the ethical risk of entering new markets, extending the supply chain to new regions, or putting extreme performance pressure on a sales force that is prone to shortcuts.

But this is exactly what the 2010 revision of the Federal Sentencing Guidelines requires of management; boards are charged with oversight over the adequacy of this ethics risk assessment.

4. Monitoring the ethical behavior of the leadership team.
No decisions are more complex than hiring and firing top executives. It is tough enough to find a prospect who has the skills needed to execute the company’s strategy for the next five years.

It is harder still to know what constitutes a disqualifying factor. He may be hard-charging, but what if he is a bully? How do you evaluate stories that she shaded the truth in talking to the board in her old job? And what is a firing offense? Falsifying a degree on a resume? Having an affair with a subordinate? Failure to tell the board about reports of a product failure?

5. Verifying that the elements of the ethics and compliance system are strong.
The Federal Sentencing Guidelines list seven to 10 elements of an “adequate” ethics and compliance management system. Every general counsel and ethics officer can show the board that they have “checked the boxes” and have these systems in place.

But does the board really know whether each part of the system works? Everyone took the annual compliance training, but did it have any effect? The company has a code of conduct, but is it viewed cynically by the staff? Do people really believe the company wants more than minimal compliance? The board needs a way of evaluating the strength of these systems, not just their existence.

By meeting each of these responsibilities, the board sets the tone for true ethical behavior in the company — and does its best to prevent future wrongdoing. Today it is not enough to be conscientious about cleaning up scandals after they occur.

Kirk O. Hanson, executive director of the Markkula Center for Applied Ethics at Santa Clara University, is offering a free massive open online course (MOOC) on business ethics for executives, Creating an Ethical Corporate Culture

The article was also published on MarketWatch.com