Ethical leadership 101

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As boards reflect on the causes of the 2008-09 financial crises, current governance studies suggest that a top priority is risk management. To help mitigate corporate risk, board leaders need to look at their company’s culture.

In a forthcoming book Great Leadership: Achieving Results with Integrity, co-authored with his son, Bob Vanourek speaks to the expanding role of directors as “leadership trustees” for the corporate culture. I met Bob a number of years ago when he was Chairman of the Board of the Vail Leadership Institute. He is a retired NYSE CEO who now writes about and teaches ethical leadership. Intrigued by their book research on 50 organizations in 10 countries, I asked Bob a few questions about the board’s role on culture to help mitigate risk.

Why should a board be concerned with culture? Isn’t that the purview of the CEO or Human Resources?

Bob Vanourek: The culture of an organization is simply “how we do things here.” Culture is the collective behaviors of the people in the organization based on their shared beliefs. Those behaviors may be ethical or not. Ethical behavior often goes beyond legal requirements. The board cannot just rely on the CEO. Of course, the CEO is also the Chief Culture Officer of the firm, but a Ken Lay or Jeff Skilling at Enron, or a Dennis Koslowski at Tyco, may deceive the board. Enron had great values and a white-shoe board, but they weren’t monitoring what was happening on the trading room floors. Remember the Enron electricity trader who gleefully said, “Burn, baby, burn” about the California wildfires during the energy deregulation crisis?

The board must also go beyond a check-the-box compliance mentality to ensure the culture is healthy to mitigate risk. Customers like to do business with ethical companies they can trust. Employees are attracted to an ethical company. Shareholders properly punish unethical companies by dumping their stock. Lawsuits from unethical behavior will damage a company’s brand and reputation for years.

An ethical reputation is an intangible corporate asset that the board has a fiduciary obligation to protect. Boards must oversee the integrity of the financial statements as well as the integrity of the culture. Not only do regulations, like Sarbanes-Oxley, require such integrity, but good business judgment does as well. So, a board must view itself as the leadership trustees for a healthy, ethical culture.

Beyond monitoring the compliance and control system, in what ways can directors monitor the company’s culture?

BV: Board members must be proactive about demanding ethical conduct. Many boards are, unfortunately, clueless in this area. They can ask management to conduct periodic surveys of employees on ethical conduct with the results reviewed by the board. They can engage independent monitors to check on ethical conduct and compliance at various levels of the organization and report back to the board. They can ask officers at board meetings or social events about the ethics of the culture and compliance with the Code of Conduct. They can ask during field visits to company sites or at customer events. When they find concerns, they need to take those issues to the CEO, insisting on learning the outcome.

How can directors in their oversight role ensure that an ethical culture exists?

BV: A tone at the top, as required by Sarbanes-Oxley, is not enough. There must be a tone from the top that permeates the organization. The board must role model ethical behavior themselves. They must ensure the written Code of Conduct is widely disseminated, endorsing it often – videos are great. The board should ensure the channels to raise ethical questions are open and uncensored. Anonymous 1-800 help lines and an Ombudsman can assist here.

Ethics training for everyone should be required. Industry specific cases with ethical dilemmas on an internal ethics web site are great training vehicles. Officer selection and promotion parameters should include ethical behavior. Compensation plans should not encourage unethical behavior with unreasonable goals or overly tempting rewards. Performance appraisals should include ethical behavior parameters. Ethical issues that managers face should come to the board for discussion, even if they have a small financial impact. Through these efforts, a board can help create and protect a healthy, ethical culture that mitigates financial and reputational risk.

How should a board handle ethical mistakes by employees?

BV: Unethical behavior must have visible consequences such as deferred promotion, penalties to bonus or stock option plans, or even termination. If confidentiality is required, then publish statistics periodically of the types of sanctions the organization has taken. Unaddressed unethical behavior will be a cancer to the organization increasing the risk to tangible and intangible corporate assets. For ethical malfeasance, casualties must be taken.”

Contact Bob at [email protected]

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