Are boards of directors truly holding senior leaders accountable on the same basis as everyone else in the organisation? Ty Francis MBE, Chief Advisory Officer at LRN Corporation, explains why equal organisational justice — holding all employees accountable regardless of their rank or financial performance — is an essential building block of ethical corporate culture. Ty argues that it is ethical culture that sustains an organisation through the toughest times.
During 2020, as part of our annual Ethics & Compliance Program Effectiveness Report, we expanded our research to assess the impact of COVID-19 on ethics and compliance at more than six hundred companies worldwide, each employing thousands to hundreds of thousands of employees. The study provided a first, holistic look at how COVID-19 affected ethics and compliance efforts. The findings illustrated that strong corporate values sustained companies through the pandemic and its profound reshaping of work-life for most everyone.
As an additional view into the data, we looked at the role and impact of boards of directors on ethical culture, business outcomes, and ethics and compliance programmes. From the findings, it was clear that boards weren’t entirely successful in holding management accountable for failures of organisational justice. Only 64% of European boards of directors had taken an active role in ensuring that any misconduct by senior executives or excellent performers was effectively addressed. This suggests up to 36% are still providing exceptions for exceptional people, which is obviously corrosive to trust by the wider organisation. Interestingly, in South America, where (generally speaking) fewer organisations have robust ethics and compliance programmes, accountability was high, at 82%. This may be attributable to the recent slew of high-profile scandals ending with senior executives being terminated or jailed. Boards are paying closer attention.
The research shows that those companies whose boards doubled down on ethics and compliance have built even stronger ethical foundations, better positioning their organisations to meet future challenges consistent with society’s elevated expectations for business. When boards take an active role in ensuring that any misconduct by senior executives or high performers is effectively addressed, leaders are more accountable for behaving ethically, the ethical culture of the organisation overall is stronger, and ethics and compliance are more embedded in the business.
In fact, when boards effectively supported the ethics and compliance programme during the pandemic, ethics and compliance considerations played an important role in the organisation’s COVID-19 response. When boards send a clear signal that their leadership must behave ethically without question, those expectations cascade through the organisation and translate into action. The data shows that employees in organisations with boards engaged in measures of ethics and compliance accountability were 1.6x more likely to do the right thing, even if it’s not in their personal best interest.
Toxic culture and employee misconduct can ruin enterprise value. As Peter Drucker has famously said:
Culture eats strategy for breakfast.
Yet boards of directors face a dilemma: they recognise the urgency of their oversight responsibilities for culture and know the effect it has on overall strategy but acknowledge that culture is difficult to evaluate and shape. So why are boards still hesitant to get involved?
To uncover more about why this dilemma persists, we went deeper with the research. In collaboration with Tapestry Networks, we interviewed 40 directors occupying 80 board seats at major public companies. Last month we published the findings in the report, Activating culture and ethics from the boardroom. It is a treasure trove of anecdotal evidence that boards feel less secure in their ability to assess culture but universally agree it is essential.
“Board oversight of corporate culture requires a more proactive stance from the board than we’ve seen in the past,” said one director. “At times it has been an area of managing by exceptions—where you hear from management only when there are problems. But it requires intentional shaping from the board.” What directors do outside the boardroom—taking time to build relationships with senior leaders or visit facilities to observe the culture—is as important as what they do during board meetings and formal interactions with executives. Yet “intrusive oversight”—which can be a necessity in a high-risk area such as ethics and compliance—may itself damage the trust between the board and the senior leadership team that is necessary to creating and maintaining ethical culture.
Several directors emphasised that equal organisational justice is essential. Indeed, senior executives, because of their visibility and influence, are often held to higher standards on some matters. Disciplinary action against senior leaders and “superstars” sends a clear and positive message to the rest of the organisation that regardless of who commits malfeasance, there are consequences. As necessary as this is, directors say that some of the most challenging episodes of their board careers have come when they needed to discipline or terminate a high-performing CEO or another senior leader. “We had to terminate a senior leader who had circumvented a capital allocation rule,” a director recalled. “This person had been at the company for a long time, and was about a month from retirement, so it felt very cruel, but we had to be clear that you can’t do that at this company.”
Boards now recognise culture as a strategic imperative, yet they also believe it receives insufficient attention due in part to lack of clear ownership at both the board level (Audit? Governance?) as well as at the management level (HR? E&C? CEO?). Companies organise in different ways, and define culture in different ways, yet there are means to measure culture quantitatively and qualitatively. It is possible to see whether or not a company is aligning its mission to its stated values and effectively defining tone from the top. For this to happen, there needs to be a management sponsor at the highest level of the organisation that prioritises it, and who has a clear line of sight into the boardroom. It’s a must for building the ethical underpinnings of the organisation for resilience and the best possible outcomes.
About the author: Ty Francis MBE is Chief Advisory Officer at LRN Corporation, a global leader in ethics and compliance solutions for global business. Prior roles include EVP at Ethisphere Institute and VP at the New York Stock Exchange.