Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
We are living through a period of lax morality and ethics. It almost seems that Americans have been divided into predator or prey and the society has descended into a jungle dominated by hunt, kill and eat. Early writers on the American Revolution suggested that, like a nurturing parent, government’s job was to arbitrate conflicts in society and keep citizens focused on the ‘better angles of their nature’. The corporate excesses of the last couple of decades are a good example of what I mean. The ‘all-for-me’ generation reached its height in the form of the CEOs and their ‘golden parachutes’.
Sarbanes-Oxley was a reaction to a wide range of corporate finance scandals – of which only a few were high profile. However, those few high-profile cases were enough elicit a reaction from Congress in an attempt to address the lack of confidence investors were showing in corporate America. Several members of corporate management, corporate finance, several Chairman and CEO’s were caught up in greed and mismanagement, and some even went to jail because of blatant misdeeds in carrying out their fiduciary responsibilities to stockholders.
Few people would disagree with punishing wrongdoers bilking millions from companies and leaving stockholders, holding the bag. Many asked the question, “is it the government’s responsibility to police corporate America”? In earlier decades, few of us might have agreed to allow Congress to decide how to spend our personal budget or how to protect their personal assets. Fewer still would have agreed to allow Congress to decide what is ethical and what is not. However, Sarbanes-Oxley was not about government prerogatives – it was about law enforcement and protecting society from predators. The so-called ‘free market’ became a jungle in which the predators became richer and the prey were diminished an extend that threatened the very fabric of society.
Corporate governance is more complex than governing most household budgets. However, corporate ethics is still about what is right or wrong. Corporations are not above the laws of society and need to be carefully monitored – particularly in these days of mega-corporations and global finance. In his farewell address, President Dwight Eisenhower warned against the rise in power of the military industrial complex. Well, it rose in power – often supported by elected officials – and the results were the excess that caused legislation like SOX to be passed.
Now advisory boards and external auditors operate under regulations such as Sarbanes-Oxley. However, the most stringent regulations cannot overcome corporate ethics and corporate cultures that encourage or refuse to acknowledge obvious corporate finance irregularities. The deeper problem lies with the culture of excess that has grown up within the corporate world – and the attitude that citizens are prey to be slaughtered and consumed. It is time to develop a new corporate ethics.
Corporate ethics start with the CEO and Chairman. However, it comes into practice through the directors elected to oversight positions and hold authority over corporate management. The leadership styles and the integrity of a company are dependent upon the ethics of the directors and their ability to get involved in the details of the information they are presented with. The area of financial review is a hot spot for this kind of activity. Many of the past ethical lapses have occurred through financial misstatement. Directors need a string ethical compass. Delving into the details must include:
- A thorough understanding by all members of the board of directors of the controls on corporate management
- An unencumbered audit committee
- A transparent relationship between corporate management and the external auditor
- A transparent relationship between the CEO/Chairman and the external auditor
- A strong well-trained internal auditor
When the CEO and corporate management understand the expectations of the board of directors for a thorough and honest assessment of the financial controls by an independent external auditor and a review of the auditor’s work by an independent internal audit committee, wrong-doings become less frequent, and attention to even minor accounting issues become more focused. Good governance of accounting and corporate finance will safeguard the integrity of the information generated for the investment community and instill confidence in the stockholders of the company.
Coaching and constant reinforcement by senior management of line management regarding corporate ethics will focus attention on the level of commitment the directors are placing on corporate integrity. Publicly prosecuting intentional violators of regulations and laws will deter some people from making an attempt at embezzlement. When wrong-doing or a breakdown in controls is discovered directors should discuss in private board meetings the details of the issue and immediately put into place additional needed controls. The CEO should be charged with instituting the new controls and with publicly discussing the breakdown and the corporate response with all employees. When the CEO shows passion and leadership on issues surrounding corporate ethics, leadership development or the personal growth of the management team, aggressive measures will be taken at all levels on these issues.
Professional governance must pay attention to all regulations and make sure compliance management measures are followed. However, only a poor, weak management team relies on regulations alone to protect their company’s integrity and reputation. Boards, CEO’s and Chairmen must demonstrate their personal commitment to honesty in their business affairs, and must be prepared to react quickly and decisively when breaches in corporate ethics occur.
In the end, directors – in their fiduciary relationship to the shareholders – are ultimately responsible – and liable – for the actions of the corporation. For too long it has been thought that the CEO and senior team bore that responsibility. However, the last couple of decades have shown that ethics are too important to be trusted to the very people who will benefit by ignoring them. Directors must step up to that responsibility and force management to operate within high ethical standards.
© Dr. Earl R. Smith II
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- Board Assessment – A Critical Part of Good Governance
- Corporate Ethics and Good Governance Leadership
- Corporate Board Dangers
- Board Ethical Standards
- Board of Directors – Major Legal and Moral Responsibilities
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2 Responses to “Business Ethics – A Function of Corporate Governance and Commitment”
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Thanks for the comment Andrew. I agree with your suggestion that government has those critical roles to play in the process of fostering good corporate ethics. Given the current economic mess, it would be hard to argue against that.
Dr Smith,
Few could argue with your viewpoint that corporate ethics must ‘start at the top,’ as you put it.
Organizations can have all the manuals about ethical behavior that they want, but the bottom line is that the behavior of both the board and that of CEO set the standard, and the behavior of staff generally tends to reflect the standards set at the top in the majority of cases.
You alluded to the role of government in fostering corporate social responsibility and accountability. In my opinion, the government has a part to play in three key areas:
(1) Defining standards of expected behavior – this is done at a national level by the setting of laws which define minimum acceptable standards, as well as through international frameworks, such as the UN Global Compact, which spell out principles which companies should follow in order to be ‘good’ companies.
(2) Setting an example – by striving to conduct their own affairs and those of their departments or state-owned enterprises in a fashion which sets a positive example for organizations to follow.
(3) Punishing negative behavior and rewarding positive behavior – unacceptable conduct should always be punished, but governments could also seek to reward socially benevolent corporate behavior. Tax breaks or subsidies, for example, could be awarded for the employment of physically disabled individuals.