ethical boards

What Are The Ethical Responsibilities of Boards?

14 January, 2021

Are you contemplating joining a Board? Perhaps you’re taking up your first board role this year. Or you may be an experienced Director, looking to refresh and stretch your leadership capacity. Board membership can be prestigious. Your experience and wisdom can have a significant impact. It can be professionally and personally satisfying. It can also be a risk to your reputation and legacy if that Board or organisation misbehaves.

Ensuring that the organisation is operating ethically, not occasionally and not for PR purposes, but to best position it for success, is a key part of a Director’s role. It’s also incumbent on them to bring different thinking and approaches to considering governance, management and strategy. Diversity of thought leads to innovation. Directors need to be prepared to challenge the status quo, to check that the current direction and practices are the right ones. Is there group think at work? How diverse are the voices in the decision making process? Does your team reflect the community they operate within?

Directors don’t require certification or qualifications to take up board roles, but they should have a commitment to the ongoing development of their leadership capacity, to ensure that their thinking and action as a board member is considered and appropriate. Working from strong ethical foundations, and investing in strengthening their own leadership practice, prepares Directors to meet the future – whatever it brings.

The following articles address some the key areas of responsibilities for Board and their Directors, from preventing ethical failures to encouraging innovation.

Responsibilities

What are the ethical responsibilities of corporate boards? Boards need to take a key role in preventing ethics failures before they happen. Particularly in times of crisis. The recent focus on AMP and Rio Tinto’s actions has highlighted the vital importance of Boards in clearly setting – from the top – the tone of an organisation. How does your board grapple with the specific challenges of its organisation and sector, and identify which principles and values should inform its vision of the future and underpin the process of rebuilding? Click here to read the full article from MarketWatch

How strong is the relationship between your board and executives? The boards that are steering their company in the right direction have a common thread, according to Vanessa Pigrum, chief executive at Cranlana Centre. A lot of this success, she says, has to do with communication and understanding. “Each board is idiosyncratic, but if I could generalise to some extent, the organisations that are handling [the pandemic] well have a strong, robust relationship between the executives and the board.” Alongside the need for effective relationships, Pigrum cited the balance between ethics and business survivability as the major concern executives are dealing with in, particularly during the pandemic. Click here to read the full article from Investment Magazine.

Do you know what behaviours and practices, intended and unintended, are created by your organisation’s incentive schemes? Are they the right ones? As Richard Bistrong says, “Bad behaviour can hide behind good performance, so business leaders need to set expectations.” Apple has announced that it’s connecting executive bonuses to progress on social and environmental issues. The compensation committee of its board of directors will increase or decrease bonus payouts by up to 10% “based on the Compensation committee’s evaluation of our named executive officers’ performance with respect to Apple Values and other key community initiatives during 2021.” There has been increased community scrutiny of executive remuneration, including bonuses, and the unintended impact of performance based incentives. Boards need to be sure they’re rewarding the means, not just the ends. Click here to read the full article from Reuters.

How effective is your Board? High functioning boards consider the bigger picture, foster quality debate in an atmosphere of trust, actively seek out diversity of thought and experience, and avoid groupthink. It’s no longer enough for them just to review financial statements and compliance activities. Boards need to focus on more forward-looking, value-creating, strategic issues. How do you help your Board develop these competencies, and ensure members are all on the same page? Click here to read the full article from Harvard Business Review

“Always be mindful, even under pressure…. Try to pause during the day and think ‘Is what I am doing going to result in fairness and justice?'” Vanessa Pigrum, CEO of Cranlana Centre, and Steven Ronson, Cranlana Centre alumnus and Executive Director of Enforcement at The Fair Work Ombudsman, share their insights on what it takes to be an ethical leader, and the importance of ethical decision-making for leadership teams and boards. Click here to read the full article from the Adelaide Advertiser.

Diversity and innovation

What do you do to encourage innovation? It begins with the courage and willingness to think differently. That begins at the board and C-suite levels. When leadership is thinking differently, they will challenge others in the company to do the same. “If you’re a member of a board or a CEO or executive and you don’t take notice of what this report is telling you, then you are not meeting your obligation to your shareholders or your owners.” Workplace Gender Equality Agency director Libby Lyons says while the headline data from their study concerned gender – for instance, that companies who appoint a female CEO increase their market value by nearly $80 million – the principle demonstrated was about diversity, and leadership in organisations reflecting the community. “The strength of this research, the strength of this information … shows that if you improve your diversity you get better results,” she said. Click here to read the full article from the ABC.

Leadership groups with people from mixed backgrounds, ethnicity and gender do better because “they challenge more, and they have more discussion and debate and that leads to better decision-making,” says Vanda Murray OBE. Research has revealed that London-listed companies are more profitable when women make up more than one in three executive roles, with a profit margin more than 10 times greater than those without. The Pipeline‘s Women Count 2020 report “shows the stark difference in net profit margins of companies that have diverse gender leaderships compared to those who do not.” The group’s co-founder Lorna Fitzsimons said having more women in the decision-making room means businesses are better able to understand their customers. Yet of the 350 largest companies listed, just 14 are led by women. 15% of companies in the FTSE 350 have no female executives at all. What strategies to increase diversity are your Board and leadership team building into their future planning? Click here to read the full article from the BBC.

Uncommon innovation is the Holy Grail because it guarantees exceptional ROI. But innovation is elusive for many companies. With limited capital and resources, mistakes are expensive and cause pain with investors, stockholders and board members.  Click here to read the full article from Entrepreneur.

A board’s role is to prepare the organisation to meet future challenges and expectations. “I look back at IPOs over the last four years and the performance of IPOs, [when] it’s been a woman on the board, in the US is significantly better than the performance of IPOs where there hasn’t been a woman on the board,” Goldman Sachs Chief Executive David M. Solomon said at the World Economic Forum in Davos. Recognising the importance of diversity on boards, from 1 July 2020 the Wall Street giant won’t take any company public unless it has at least one “diverse” board member in 2020, and two in 2021. Is your organisation meeting the expectations of investors, community and staff? Click here to read the full article from New York Post.

A changing environment

The Ethics Index quantifies the perceptions of adult Australians of the overall importance of ethics, and what the actual level of ethical behaviour is, within society. On climate change the message for business leaders is clear – Australians believe they have an urgent ethical obligation to act. Former High Court judge and royal commissioner Kenneth Hayne has also warned directors they have a legal duty to act on climate change risk, include it in corporate strategies and report on it to shareholders, raising the real prospect that boards failing to act could end up in court. Click here to read the full article from Lawyers Weekly.

Every year, in the second or third week of January, Larry Fink, Chairman and CEO of Black Rock, writes a letter to CEOs of the world. As one of, if not the, largest investors in the world – BlackRock oversees $7 trillion –  these letters have impact. CEOs and Boards pay attention, and they react. As the New York Time’s Michael Barbaro says, his letters have ‘a kind of biblical quality in the world of business.’ Reflecting increasing concerns, in 2020 Larry Fink addressed the climate crisis. Click here to read the full article from The New York Times.

Investment giant BlackRock also sent tremors through corporate board rooms when it backed a resolution that would have required Australia’s biggest electricity provider, AGL Energy, to close its coal-fired power plants earlier than planned. In the absence of coherent government policy or a price on carbon, could the best hope for effective action come from enlightened business decisions? Lead Moderator Peter Mares says Australia’s collective retirement savings — now nudging $3 trillion — give fund managers huge leverage. Click here to read the full article from Inside Story.

The evolving expectations from investors, shareholders, customers and community continue against the backdrop of a pandemic which has forced rapid, unexpected change on every organisation. Boards are in for a bumpy ride for the next few years. Make sure your ethical leadership capacity is firmly grounded, and face the future with confidence.

1 February 2020

Cranlana Centre for Ethical Leadership’s programs include the 2 day Executive Ethics, 6 day Executive Colloquium and year-long Vincent Fairfax Fellowship. We also deliver online and tailored corporate programs. Find the right program for you. They are all held under the Chatham House Rule to encourage genuine and open debate, and allow participants to candidly discuss sometimes sensitive issues in private while allowing the topic and nature of the debate to be made public, and contribute to a broader conversation. The alumni program offers ongoing leadership development support and a lifelong connection with Cranlana.

Photo by Michael Payne on Unsplash