Executives inevitably see themselves as responsible for the success of their organizations – and perhaps blame the microeconomic environment and other factors when they fail. This sense of accomplishment oftentimes comes with a surreal feeling of invincibility and executives sometimes have a sense that with all the responsibility on their shoulders, Non-Executive Directors should not question their proposals as that would only distract them. Thus, they sometimes tend to take excessive risks which could put shareholders value at risk. Where these pay off, they feel justified to “extract” excessive compensation.
However, there is a thin line between excessive risk taking and unethical conduct. In the continuous effort to align shareholder value with those of Managers, the Board seeks ways of linking executive compensation to corporate performance. Performance bonuses based on profit and other metrics, share options and grants are incentives that seek to achieve this alignment. For the most part, these are effective. However, where the Board has not hired executives with high ethical values, these tend to engender bad behavior- performance at all cost.
This is not to say that all that is required is seeking and hiring “honest, morally upright and good people”. Executives with a track record of “moral uprightness” have been known to “turn coat” or “succumb to temptation”. In the same vein, formulating a detailed written statement of ethics or specific documented policies do not necessarily prevent ethical misconduct. The 65-page Enron Corporate Code of Ethics was intended to help guide employees in “conducting the business affairs…in accordance with all applicable laws and in a moral and honest manner.” Things didn’t quite pan out as envisaged.
What then should the Board do? Typically, the start point is for the Board to define the culture of the organization. This is a major responsibility of the Board which it cannot delegate to Management. Clearly, drilling down across the organization will be the responsibility of Management and monitored periodically by the Board. What values do we want to espouse? What kind pf people do we want to be? How do we want to do business? Once the Board has clarity on this, it needs to have this documented in the form of a Code of Ethics, which provides guidance on compliance expectations. As much as possible, the Code should provide examples to guide employees and clarify expectations. A Whistle Blowing Policy and appropriate mechanism for implementation should also be put in place.
The Board then needs to set the appropriate “tone at the top” by demonstrating a commitment to the ethical values it has defined. Designating a corporate ethics officer of sufficient seniority, reporting to the Board (this is critical) and an ethics management team to manage Corporate Ethical Culture is an indication of the Board’s commitment and sends a message that the Code of Ethics and related policies are not perfunctory. In addition, hiring and firing decisions must incorporate the organization’s values. The performance appraisal process must tie reward systems to indicators of integrity as well as to other measurements of productivity. Furthermore, it is important to consistently reward integrity and to make sure that these instances are publicized throughout the organization. It is also important that a transparent disciplinary process is in place to deal with violations. There should be no “sacred cows” and decisive action should be taken where violation is established – at whatever level.
The Board should ensure that there is on-going ethical training, not just for employees, but for third parties the organization deals with – vendors, suppliers, consultants, regulators, etc. As much as possible, practical sessions should be incorporated into the training programs to ensure clarity.
Having set out the ground rules, the appropriate tone, there should be a system in place to monitor employee conduct to ensure there is alignment with expectations. A periodic review of the various decision-making systems and critical points where the organization may be vulnerable should be undertaken. The Board should ensure that the Whistle Blowing Mechanism continues to be effective and that whistle blowers are adequately protected. It is good practice to outsource the whistle blowing mechanism to ensure confidentiality and encourage employees to use it. To ensure that it is not perceived as a “feel good” or “nice to have”, it is imperative that decisive action is taken against ethical misconduct – no matter who the culprit is.
Bisi Adeyemi is the Managing Director of DCSL Corporate Services Limited. For comments and reactions, kindly contact badeyemi@dcsl.com.ng.