Category: Starting a Business

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.