Ethics and the Board

In theory, the board should be the primary custodian of ethics for the organisation. Individually and collectively, board members should be ethics champions who ensure that ethics is kept in focus constantly. But, in practice, ethical scandals like the unfolding Steinhoff crisis and the governance failures at many of our state-owned enterprises lend themselves to question if this is actually the case. Was (or is) ethics sidelined in favour of profit or in pursuit of personal gain for board members and their inner circle? The following seven questions address the key issues that boards should be aware of and should address to make sure that they give full effect to their ethical role.

1. Are your board members sufficiently competent as regards ethics? Do they understand the top ethical risks in their environment and do they stay informed of emerging ethical challenges? The board should have regular ethics training sessions (facilitated ethics conversations) to address issues such as unconscious bias and unintended discrimination (discussed in our other lead article) and the risks associated with supply chain ethics and the contagious effect of eroded trust. Patrick Quinlan’s suggestion in his article in the May 2018 issue of Forbes, Three Markers of an Ethically Sound Board, is worth noting: "It is a forward-looking idea to appoint one (external) person who is completely dialed into ethics and compliance, has a measure of independence and to have that person regularly communicate with the board".
2. How is ethics actually viewed by the board? Is ethics viewed as an asset that bolsters the organisation’s culture and reputation and builds ethical capital? Or is ethics considered an obstacle to maximising business or personal opportunities? The focus on ethics also needs to expand beyond compliance. While it is essential that organisations concentrate on reducing unethical conduct, it is equally important that this is coupled to a focus on strengthening values and improving ethical conduct. An analogue that illustrates the need for this dual focus is about profit: Increasing profit is best achieved by increasing revenue and decreasing costs.
3. Does the board seek adequate assurance as regards the extent to which the organisation has an ethical culture, and do they receive the information that they need to provide appropriate oversight of the organisation’s ethics? Ethics assessments are an easy and effective way of allowing the board to be well informed about the details of ethical behaviour, perceptions and practices within the organisation. This is recommended by King IV^TM for all organisations, while this requirement in the Companies Act Social and Ethics Committee is limited to larger organisations (on a point system). In seeking ethical assurance, the board should insist that the assessment moves beyond ethical awareness to evaluate ethics in terms of issues such as behaviour and management practices, that the assessment provides insight as regards the organisation’s primary ethical strengths and risks, and that the assessment methodologies provide credible, representative results.
   The board should recognise that assurance as regards an organisation’s ethics also applies to mergers and acquisitions. Insistence on an assessment of the organisation’s ethics as part of a due diligence can add considerably to the depth of insight into the target company.
4. Does the board ensure that the organisation has a sound ethics management system and that ethics is effectively operationalized? The lack of an integrated, systemic approach to managing ethics compromises the extent to which ethics is put into practice – and, by extension, places the organisation’s reputation at greater risk. An example that illustrates this point is the management system that would apply to safety in the mining industry. It would be based on rigorous methodologies or frameworks, supported by a coordinated set of checks and balances, extending to personal KPIs from the most senior to the most junior staff. As safety is a very desirable goal that warrants such support, so too does ethics warrant a comprehensive management system.
5. Has the board included ethics as a strategic organisational goal and has it formulated a supporting ethics strategy? Or has the board integrated ethics into the organisation’s mission, vision or strategic intent, and embedded it into the business strategy? Including ethics as a formal, written goal serves not merely to highlight the organisation’s commitment to ethics but, as for all goals, provides an invaluable direction and focus for the organisation and its people. This can also serve to clarify the organisation’s priorities which acts as a critical guide when, for example, there is a conflict between business goals and ethics.
6. Has the board positioned ethics as being a daily job that applies to everyone? Ethics should not be limited to a single department or a single person. There is great value in having a designated ‘home’ for ethics within the organisation, and for that function to ensure an on-going focus on the organisation’s ethical awareness and health. So too is it important that the Social and Ethics Committee fulfils an oversight role that ensures that ethics is effectively monitored and reported on and that "proactive ethics does not play second fiddle to self-protective compliance" (Patrick Quinlan, Forbes, 22 May 2018). But the fact that the protection and promotion of ethics is everyone’s job should be the overriding message.
7. Is the board well equipped to handle an ethical crisis? While proactive management is ideal, it can nonetheless arise that a board needs to respond reactively to an ethical crisis. Tiger Brands is a prominent current example, where the company is facing two class-action lawsuits over a listeria outbreak that emanated from its Enterprise factory in Polokwane that has killed 180 people. Such situations require that boards have to step up to define how the crisis will be managed or what steps will be taken to rectify the problem. Crucially, boards need to be aware that how they deal with the crises will leave a lasting legacy and can maximise or minimise the damage to the company. The author has a model, the A5 model, which defines the key steps to be followed when dealing with a major ethical breach. Admitting is the first step, which entails honest and transparent communications, shared as promptly as possible. Taking accountability is an important next step, often done in conjunction with the third step, that being to apologise. Making amends follows, which should also be done timeously. And finally, organisations should strive to ensure it ‘does not do it again’. This implies not only that the specific ethical breach should not be repeated, but that a greater focus on ethics should strive to minimise the risk of other ethical failures too.

The key question that remains is whether boards are asking the right questions as regards ethics? For boards, the quality of the questions that they ask and require to be answered represent a key mechanism to guide the organisation and keep it on the right path.

By Cynthia Schoeman