Category: Business Laws & Ethics

Many directors of Government owned enterprises take up the role because they want to have an effect on the organisation and, through the organisation, on the society they live in and will bequeath to their children. Indeed, they are frequently appointed because the shareholder sees their passion for effecting change in that way and feels that it would add value to the board.

Even directors who do not profess a burning sense of mission will admit to a deep sense of responsibility for organisational and societal outcomes. In all my conversations with directors of government owned enterprises I have never found one who was there purely for the money. This is hardly surprising as the organisations themselves, whilst expected to operate efficiently and, in many cases, to generate profits that provide taxation and dividend income to the shareholder, are not constituted for financial reasons alone.

Regardless of what the passion is, whether it is conservation of the environment, empowerment of employees, preservation of heritage, education of youth or care for the needy, it must be controlled and focused by the boardroom processes to achieve its true expression in organisational results and societal or environmental impact.

Traction or Friction?

Unfortunately for many directors, this is where the rubber hits the road and it all comes to a screeching halt. So many things conspire to turn the desired traction into frustrating friction. In addition, although there is sometimes education available for new directors on legal, financial and procedural matters there is very little guidance on how to constructively live their passion and positively effect change through the organisation. Think about it: when was the last time that you received practical instructions on how to broach difficult topics with unsympathetic people and then continue to have a high performing relationship with them after you have done so?

In addition to uncertainty about how to bring their passion to bear on the processes and outcomes, there are many other things that act as distractions: finances to analyse, planning and budgeting cycles, technology roll outs, training programs, recruitment or retrenchment activity, regular reports to the shareholder, requests from the shareholder for information or policy advice, and pressure to stick to the accepted agenda and processes that, ostensibly, satisfy the other board members.

Many directors are overwhelmed by this activity and, when it is exacerbated by the self protection of the status quo, they simply give up, or wait for an opportune moment to unleash their passion. It is a moment which never seems to arrive. They are frequently good directors, diligent and dedicated, but they somehow feel that they are not really achieving all that they could or should. Sometimes the shareholder feels the same way and, after a term or two as a director, they are not reappointed, but are quietly replaced and, as nobody ever knew for sure what the director’s passion was, nobody is ever sure just how valuable an opportunity might have been missed.

Other directors strive to have the effect they want but find all their efforts are ineffective and, worse, some are counterproductive and cost them the relationships that they need as political capital to pursue their aims. They become branded as troublesome, impractical, or even unethical. They are seldom reappointed and, again, valuable opportunities to incorporate their thoughts into the board’s machinations are lost.

Only directors who can apply their passion in a board-appropriate manner will successfully manage to influence events and corporations.Few directors receive any training in how to do this.

What do you think?

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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her book Dilemmas, Dilemmas: Practical Case Studies for Company Directors.

As demands for Board effectiveness and accountability continue to grow, research and discussions about how Boards might operate differently, continue to grow, as well. There are a variety of new ideas for Board models.

Networked Governance

David Renz suggests that the effectiveness of governance could be enhanced when we realize that governance can include organizations and activities that go beyond the role of the Board in an organization. Nowadays, many nonprofit services to a community are often delivered across a network of organizations and, thus, the distributed governance of that network is a key point in the effectiveness of those services. Renz mentions the advantages of the perspective on networked governance and also mentions the difficult challenges inherent in that perspective, for example, how can individual nonprofits and Boards influence the overall network and how can we ensure that individual Boards are doing their fiduciary responsibilities.

System-Wide Governance

Judy Freiwirth asserts that the traditional “top down,” “command and control” paradigm of Boards actually gets in the way of the nonprofit’s successfully working toward its mission. She suggests that the governance responsibility to be shared among constituents, including members, staff and Board. In System-Wide Governance, Board members are from the community and constituency. Although, governance is very democratic in nature, Board members do perform some legal and fiduciary responsibilities. She mentions the Whole Scale Change methodology as an example of how constituency-based planning and operations can be successful.

Community-Driven Governance: Governing for What Matters

Community-Driven Governance is a framework that defines a Board’s primary purpose as leadership towards making a significant, visionary difference in the community the organization serves. The Board’s work centers around an annual plan that aims first and foremost at the difference the organization will make in the community. The plan then addresses the organizational infrastructure needed to implement that plans. The approach is intended to be simple enough for any Board to put into practice, while comprehensively addressing first the ends, and then the means for which a Board will hold itself accountable. The approach also aims to avoid a typical problem in Boards when they attend primarily to internal operations, rather than truly representing the needs of stakeholders.

See Governing for What Matters by Hildy Gottlieb

Relationship Model

Steven Block proposes a model that, instead of having a rigid, top-down structure of roles and hierarchy of the traditional policy model, provides for Board and staff members to work together with great priority on generating relationships and value from those relationships. The Executive Director and staff play an important role in bringing matters to the group (a group of Board members and staff) and their opinions are greatly valued. Board and staff share experiences together, for example, rituals and meals, to develop relationships. Board members are not expected to take part in activities outside Board meetings. They can be there to assist staff. Committees are not used.

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Carter McNamara, MBA, PhD – Authenticity Consulting, LLC – 800-971-2250
Read my weekly blogs: Boards, Consulting and OD, Nonprofits and Strategic Planning.

This blog post has been moved to the Business Ethics topic in the Library.

The following guidelines ensure the ethics management program is operated in a meaningful fashion:

1. Recognize that managing ethics is a process.

Ethics is a matter of values and associated behaviors. Values are discerned through the process of ongoing reflection. Therefore, ethics programs may seem more process-oriented than most management practices. Managers tend to be skeptical of process-oriented activities, and instead prefer processes focused on deliverables with measurements. However, experienced managers realize that the deliverables of standard management practices (planning, organizing, motivating, controlling) are only tangible representations of very process-oriented practices. For example, the process of strategic planning is much more important than the plan produced by the process. The same is true for ethics management. Ethics programs do produce deliverables, e.g., codes, policies and procedures, budget items, meeting minutes, authorization forms, newsletters, etc. However, the most important aspect from an ethics management program is the process of reflection and dialogue that produces these deliverables.

2. The bottom line of an ethics program is accomplishing preferred behaviors in the workplace.

As with any management practice, the most important outcome is behaviors preferred by the organization. The best of ethical values and intentions are relatively meaningless unless they generate fair and just behaviors in the workplace. That’s why practices that generate lists of ethical values, or codes of ethics, must also generate policies, procedures and training that translate those values to appropriate behaviors.

3. The best way to handle ethical dilemmas is to avoid their occurrence in the first place.

That’s why practices such as developing codes of ethics and codes of conduct are so important. Their development sensitizes employees to ethical considerations and minimize the chances of unethical behavior occurring in the first place.

4. Make ethics decisions in groups, and make decisions public, as appropriate.

This usually produces better quality decisions by including diverse interests and perspectives, and increases the credibility of the decision process and outcome by reducing suspicion of unfair bias.

5. Integrate ethics management with other management practices.

When developing the values statement during strategic planning, include ethical values preferred in the workplace. When developing personnel policies, reflect on what ethical values you’d like to be most prominent in the organization’s culture and then design policies to produce these behaviors.

6. Use cross-functional teams when developing and implementing the ethics management program.

It’s vital that the organization’s employees feel a sense of participation and ownership in the program if they are to adhere to its ethical values. Therefore, include employees in developing and operating the program.

7. Value forgiveness.

This may sound rather religious or preachy to some, but it’s probably the most important component of any management practice. An ethics management program may at first actually increase the number of ethical issues to be dealt with because people are more sensitive to their occurrence. Consequently, there may be more occasions to address people’s unethical behavior. The most important ingredient for remaining ethical is trying to be ethical. Therefore, help people recognize and address their mistakes and then support them to continue to try operate ethically.

8. Note that trying to operate ethically and making a few mistakes is better than not trying at all.

Some organizations have become widely known as operating in a highly ethical manner, e.g., Ben and Jerrys, Johnson and Johnson, Aveda, Hewlett Packard, etc. Unfortunately, it seems that when an organization achieves this strong public image, it’s placed on a pedestal by some business ethics writers. All organizations are comprised of people and people are not perfect. However, when a mistake is made by any of these organizations, the organization has a long way to fall. In our increasingly critical society, these organizations are accused of being hypocritical and they are soon pilloried by social critics. Consequently, some leaders may fear sticking their necks out publicly to announce an ethics management program. This is extremely unfortunate. It’s the trying that counts and brings peace of mind — not achieving an heroic status in society.

What do you think?

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Carter McNamara, MBA, PhD – Authenticity Consulting, LLC – 763-971-8890
Read my weekly blogs: Boards, Consulting and OD, Nonprofits and Strategic Planning.

Board conversations should not be comfortable, routine exchanges of information concerning pre-agreed topics, facts and interpretations. They need to test the boundaries of the known to enable the organisation to profit from uncertainty whilst conceiving and avoiding risks that are emerging.

Such conversations are inherently dangerous and require a degree of trust among the participants. Challenging the status quo whilst supporting the current management and developing the next generation of managers requires boards to have a wide range of behavioural and conversational modes. As knowledge is developed through these conversations it must be recorded so that it is not lost; if records are not kept then knowledge will need to be regenerated in every meeting, wasting valuable time and undermining progress.

Recent trends and tendencies threaten this process by restricting the information contained in board minutes so that only ‘safe’ records are maintained. Legal advice to record only the issue and the decision protect boards if minutes are disclosed in legal proceedings. They also render the minutes virtually useless as a means of developing corporate memory.

This process has led many directors into the habit of making their own records, often by annotating their board papers or in a private ‘board diary’. These documents then leave to company and are stored as each individual director sees fit. Whilst these personal notes assist individual directors when they need to remember the nuances of difficult conversations about risky decisions they participated in, they can be a source of great embarrassment if they fall into the public domain.

Some companies manage this risk by requiring all board materials to be returned to the company secretary or some other person) for secure disposal. They enter into a ‘deed of access’ which gives the individual directors a right to examine the official records should a need arise. The most sophisticated companies manage this process by using ‘electronic board packs’ which allow directors to make notes on a version for use up to and during the meeting but then destroy all marked papers and retain only a clean copy for the company register.

Other companies request that directors destroy their papers after a pre-agreed period of time.

Neither of these risk mitigation strategies controls personal diary notes or compensates for the loss of qualitative data about the factors that were considered in reaching each decision. Some governance advisers have called for boards to record in the minutes which directors voted for or against each decision. This information is useless without a background of the facts presented and the interpretation given to these facts during the board’s conversation. Disclosing individual votes serves only to weaken board unity. All board members are responsible for all actions of the company taken pursuant to a decision of the board, regardless of whether they voted for or against it.

Rather than recording votes (although abstentions should be recorded where this information serves as evidence of the board properly managing a conflict of interest) it would serve the company better if the minutes recorded the key elements of the discussion so that these were available for later review. Far better to have the assumptions clearly recorded so that decisions can be revisited if key assumptions prove to have been wrong. Most boards are more likely to revisit a decision than they are to be called upon to defend it in court.

If you do end up in court it is better to be able to state that the board considered a range of issues before making its decision when, with the benefit of hindsight, unfriendly barristers are suggesting that the decision was negligently or recklessly made.

A side effect of such record keeping is that the truly negligent boards would then be easy to identify.

The downside, of course, is that dangerous and radical ideas would be recorded and, from time to time, could surface in public records, exposing the board members to ridicule or retribution. One director said that, when her company was being criticised for slow growth compared to rivals she reviewed past minutes and found that the board had considered collateralised debt instruments but had decided not to use them as they couldn’t understand them and it appeared from the board discussion that management didn’t understand them either. The original board decision was reviewed several times but never overturned; each time the opacity of the instruments deterred the board from approving their use. The board members felt no qualms about recording their inability to understand the CDOs even though the information could have been used against them if it became public. The GFC passed and the company then performed well compared to peers. Several billion positive reasons to record dangerous ideas in board minutes!

What do you think?

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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her book Dilemmas, Dilemmas: Practical Case Studies for Company Directors.

What’s an Ethics Management Program?

Organizations can manage ethics in their workplaces by establishing an ethics management program. Brian Schrag, Executive Secretary of the Association for Practical and Professional Ethics, clarifies. “Typically, ethics programs convey corporate values, often using codes and policies to guide decisions and behavior, and can include extensive training and evaluating, depending on the organization. They provide guidance in ethical dilemmas.” Rarely are two programs alike.

“All organizations have ethics programs, but most do not know that they do,” wrote business ethics professor Stephen Brenner in the Journal of Business Ethics (1992, V11, pp. 391-399). “A corporate ethics program is made up of values, policies and activities which impact the propriety of organization behaviors.”

Bob Dunn, President and CEO of San Francisco-based Business for Social Responsibility, adds: “Balancing competing values and reconciling them is a basic purpose of an ethics management program. Business people need more practical tools and information to understand their values and how to manage them.”

Benefits of Managing Ethics as a Program

There are numerous benefits in formally managing ethics as a program, rather than as a one-shot effort when it appears to be needed. Ethics programs:

1. Establish organizational roles to manage ethics
2. Schedule ongoing assessment of ethics requirements
3. Establish required operating values and behaviors
4. Align organizational behaviors with operating values
5. Develop awareness and sensitivity to ethical issues
6. Integrate ethical guidelines to decision making
7. Structure mechanisms to resolving ethical dilemmas
8. Facilitate ongoing evaluation and updates to the program
9. Help convince employees that attention to ethics is not just a knee-jerk reaction done to get out of trouble or improve public image

What do you think?

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Carter McNamara, MBA, PhD – Authenticity Consulting, LLC – 800-971-2250
Read my weekly blogs: Boards, Consulting and OD, Nonprofits and Strategic Planning.

Many people are used to reading or hearing of the moral benefits of attention to business ethics. However, there are other types of benefits, as well. The following list describes various types of benefits from managing ethics in the workplace.

1. Attention to business ethics has substantially improved society.

A matter of decades ago, children in our country worked 16-hour days. Workers’ limbs were torn off and disabled workers were condemned to poverty and often to starvation. Trusts controlled some markets to the extent that prices were fixed and small businesses choked out. Price fixing crippled normal market forces. Employees were terminated based on personalities. Influence was applied through intimidation and harassment. Then society reacted and demanded that businesses place high value on fairness and equal rights. Anti-trust laws were instituted. Government agencies were established. Unions were organized. Laws and regulations were established.

2. Ethics programs help maintain a moral course in turbulent times.

Attention to business ethics is critical during times of fundamental change — times much like those faced now by businesses, both nonprofit or for-profit. During times of change, there is often no clear moral compass to guide leaders through complex conflicts about what is right or wrong. Continuing attention to ethics in the workplace sensitizes leaders and staff to how they want to act — consistently.

3. Ethics programs cultivate strong teamwork and productivity.

Ethics programs align employee behaviors with those top priority ethical values preferred by leaders of the organization. Usually, an organization finds surprising disparity between its preferred values and the values actually reflected by behaviors in the workplace. Ongoing attention and dialogue regarding values in the workplace builds openness, integrity and community — critical ingredients of strong teams in the workplace. Employees feel strong alignment between their values and those of the organization. They react with strong motivation and performance.

4. Ethics programs support employee growth and meaning.

Attention to ethics in the workplace helps employees face reality, both good and bad — in the organization and themselves. Employees feel full confidence they can admit and deal with whatever comes their way. Bennett, in his article “Unethical Behavior, Stress Appear Linked” (Wall Street Journal, April 11, 1991, p. B1), explained that a consulting company tested a range of executives and managers. Their most striking finding: the more emotionally healthy executives, as measured on a battery of tests, the more likely they were to score high on ethics tests.

5. Ethics programs are an insurance policy — they help ensure that policies are legal.

There is an increasing number of lawsuits in regard to personnel matters and to effects of an organization’s services or products on stakeholders. As mentioned earlier in this document, ethical principles are often state-of-the-art legal matters. These principles are often applied to current, major ethical issues to become legislation. Attention to ethics ensures highly ethical policies and procedures in the workplace. It’s far better to incur the cost of mechanisms to ensure ethical practices now than to incur costs of litigation later. A major intent of well-designed personnel policies is to ensure ethical treatment of employees, e.g., in matters of hiring, evaluating, disciplining, firing, etc. Drake and Drake (California Management Review, V16, pp. 107-123) note that “an employer can be subject to suit for breach of contract for failure to comply with any promise it made, so the gap between stated corporate culture and actual practice has significant legal, as well as ethical implications.”

6. Ethics programs help avoid criminal acts “of omission” and can lower fines.

Ethics programs tend to detect ethical issues and violations early on so they can be reported or addressed. In some cases, when an organization is aware of an actual or potential violation and does not report it to the appropriate authorities, this can be considered a criminal act, e.g., in business dealings with certain government agencies, such as the Defense Department. The recent Federal Sentencing Guidelines specify major penalties for various types of major ethics violations. However, the guidelines potentially lowers fines if an organization has clearly made an effort to operate ethically.

7. Ethics programs help manage values associated with quality management, strategic planning and diversity management — this benefit needs far more attention.

Ethics programs identify preferred values and ensuring organizational behaviors are aligned with those values. This effort includes recording the values, developing policies and procedures to align behaviors with preferred values, and then training all personnel about the policies and procedures. This overall effort is very useful for several other programs in the workplace that require behaviors to be aligned with values, including quality management, strategic planning and diversity management. Total Quality Management includes high priority on certain operating values, e.g., trust among stakeholders, performance, reliability, measurement, and feedback. Eastman and Polaroid use ethics tools in their quality programs to ensure integrity in their relationships with stakeholders. Ethics management techniques are highly useful for managing strategic values, e.g., expand marketshare, reduce costs, etc. McDonnell Douglas integrates their ethics programs into their strategic planning process. Ethics management programs are also useful in managing diversity. Diversity is much more than the color of people’s skin — it’s acknowledging different values and perspectives. Diversity programs require recognizing and applying diverse values and perspectives — these activities are the basis of a sound ethics management program.

8. Ethics programs promote a strong public image.

Attention to ethics is also strong public relations — admittedly, managing ethics should not be done primarily for reasons of public relations. But, frankly, the fact that an organization regularly gives attention to its ethics can portray a strong positive to the public. People see those organizations as valuing people more than profit, as striving to operate with the utmost of integrity and honor. Aligning behavior with values is critical to effective marketing and public relations programs. Consider how Johnson and Johnson handled the Tylenol crisis versus how Exxon handled the oil spill in Alaska. Bob Dunn, President and CEO of San Francisco-based Business for Social Responsibility, puts it best: “Ethical values, consistently applied, are the cornerstones in building a commercially successful and socially responsible business.”

9. Overall benefits of ethics programs:

Donaldson and Davis, in “Business Ethics? Yes, But What Can it Do for the Bottom Line?” (Management Decision, V28, N6, 1990) explain that managing ethical values in the workplace legitimizes managerial actions, strengthens the coherence and balance of the organization’s culture, improves trust in relationships between individuals and groups, supports greater consistency in standards and qualities of products, and cultivates greater sensitivity to the impact of the enterprise’s values and messages.

10. Last – and most — formal attention to ethics in the workplace is the right thing to do.

What do you think?

(There is much more about ethics and social responsibility in that topic in the Free Management Library.)

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Carter McNamara, MBA, PhD – Authenticity Consulting, LLC – 763-971-8890
Read my weekly blogs: Boards, Consulting and OD, Nonprofits and Strategic Planning.