Boards of Directors Must Commit to Business' New Moral Compass

2003
Frank Vogl

ERC President Stuart Gilman says that "you can't legislate ethics." Yes, he's right. So, how can the leadership of Corporate America once again find its moral compass? How can it cast aside its greed and arrogance and corruption and ensure that sound ethical behavior is the first business management priority?

The answer rests squarely in the Board of Directors. For too long too many Boards have either been fast asleep or mere rubber stamps for dogmatic Chief Executive Officers. They ignored corporate ethics codes, granted outrageous compensation to top executives, agreed to vast personal loans to powerful chief executive officers, and slumbered in the midst of massive abuse.

Structurally there have to be two key reforms: First, the majority of the members of the Board should be non-executive (i.e. not in the employ of the corporation in any staff or managerial capacity) and independent (i.e. they should not have any business relationship to the corporation that would create a conflict of interest). Second, to guard against unrestrained corporate power, a non-executive chairperson should head the Board. Thus the practice of one person being both CEO and chairperson should be ended.

Against this background, the Board of Directors should implement as a key priority a 6 point ethics framework:

1. Commitment. Commitment to sound ethics is crucial. The Board of Directors should recognize that it is responsible for the corporate Ethics Code, for its consistent and regular review, for its implementation by management, for its full acceptance by all employees and for its central place in the forging of the corporate culture.

2. Accountability. The Board needs to explicitly assign authority to senior management for the implementation of the corporate integrity programs. The CEO should understand that his/her acronym also stands for 'Chief Ethics Officer.' Moreover, the Board should jointly appoint with the CEO a corporate chief ethics director who reports both to the CEO and directly to the Board. The corporate ethics office should have a budget, set by the Board, which is sufficient to ensure the implementation of sound programs to strengthen employee acceptance of the corporation's ethics policies.

3. Policies. Through a distinct, high profile, committee consisting of non-executive independent directors, the Board should establish clear policies, including performance objectives, which are based on the Code of Conduct. Such policies need to range across the full field of corporate ethics issues, from domestic workplace matters of equity and diversity and honesty, to international issues of foreign worker rights and transparent and non-corrupt dealings with foreign government officials. To fully implement the policies, corporate management will have to design effective training programs, executive evaluations, employee surveys and additional approaches.

4. Compensation. The Board needs to recognize that issues pertaining to top management compensation are widely seen as ethical issues. Board compensation committees (which should be composed exclusively of non-executive, independent directors) need to consider the public perception of the corporation's values when determining top pay. To attain this, these committees should make public far more detail on how they arrived at the compensation packages for top executives and how they justify the ratio they have set between the total compensation of the CEO and that of the average corporate employee. The Compensation Committee's scope needs to be broadened to also consider corporate fees to major consulting entities. Indeed, consideration should be given to mandating the Compensation Committee to review major corporate payments (perhaps those in excess of $1 million per year) to external consultants and ensure that the amounts paid, be they to law firms or auditing firms, are contained in official SEC filings.

5. Communications. The Board needs to be held responsible for ensuring the Ethics Code, the policies supporting the Code and the management's performance relative to the application of the Code are truthfully communicated to all employees, retirees and shareholders. There is no point having a Code if nobody knows about it. Communicating is integral to the demonstration of the Board's commitment and its accountability. A valuable tool in this regard would be an annual corporate integrity report, signed by the Chairperson, which provides very substantial detail on how the corporation has performed relative to goals based upon the Code of Ethics.

6. Leadership. The Board should actively encourage the CEO to provide internal and external leadership in the ethics area. Boards need to ensure that their corporations are visible and active participants in public discussions, at home and abroad, of corporate values and the social responsibilities of business. Today, in particular, when major decisions are being taken by regulators and politicians with regard to corporate governance and global corporate citizenship, it is important that CEOs, clearly backed by the Boards, are seen to be active and constructive participants alongside watchdog organizations, regulators, and shareholder groups. Corporations have a vital interest in sitting at the negotiating tables at this time.