Samuel DiPiazza: It’s all down to personal Values

Private ethics and public corporate integrity are indivisible, says Samuel DiPiazza. That is the key lesson of recent business scandals. What is necessary now is to establish codes and systems – both personal and corporate – that will spur courage and combat fear

Private ethics used to be just that – a private matter. Ethics were a concern that existed between the individual and his or her conscience and values. Many assumed that grave ethical misdeeds in the management of a business would sooner or later be discovered and dealt with by the appropriate corporate or governmental authority.

There was little active interest in private ethics, although corporate and professional ethics programmes had found a place in major organizations. The notion that ethical misdeeds could shake markets, global companies, large populations and governments seemed remote. We were wrong to believe this.

In recent years the business community worldwide has seen that private ethics exert a powerful, though initially invisible, force on the course of business. What once seemed a somewhat routine management issue, addressed by good audits and compliance programmes, now looks anything but routine.

Worldwide, corporate integrity is subject to investor doubt, employee anxiety and new legislation and regulation. It has become dramatically clear that the foundation of corporate integrity is personal integrity. News reports have repeatedly shown us that individual failures of integrity can be the source of vast corporate deceptions. And the integrity of corporate reporting to the public has become a focus of sustained concern. (I have made my own contribution to the debate in a recently published book, Building Public Trust: The Future of Corporate Reporting.)

Yet through this difficult time we are learning to think more effectively than ever about a wide range of issues, from private ethics and corporate culture to national and international laws and codes. And we have understood that effective private ethics must be linked to courage – the courage to be relentless in understanding complex issues and to speak out and act when necessary.

Our focus must turn to individual business people making ethically sensitive choices in the course of their daily work and at key milestones in the business cycle, such as the preparation of financial statements. Because individuals act in context, we will need to keep four factors in mind:

• codes and systems – be they corporate, professional, regulatory, judicial or legislative – that define, encourage, enforce or test ethical business conduct;
• private ethics in the context of organizational ethics;
• the corporate culture that mediates between the individual and ethical codes and systems;
• external forces such as competition, economic conditions and currents of opinion in public life that exert pressure on business, financial and governance decisions.

There will not be space in this brief article to examine each of these factors separately, but they all play a role.

Codes and systems: the framework of corporate integrity

Current thinking suggests that larger companies need written codes of conduct that are forthright, comprehensive and clear. At PricewaterhouseCoopers more than 125,000 people worldwide operate within a Global Code of Conduct, which articulates the principles of integrity and accountability by which generations of our professionals have been guided.

However, it is obviously not enough to distribute a document. The written code must be activated. A confidential channel for individuals to report questions and concerns should be available to all employees. Helplines are often used.

Training programmes must vividly convey the specific kinds of ethical dilemmas that can arise in the course of a company’s business, as well as the resources available for resolving those dilemmas with integrity.

And, arguably most important of all, senior executives must live by the code of conduct, just as they expect all others in the company to live by it.

These four elements – code, reporting channel, training and internal communications, and top management example – make a whole.

People in an organization pick up quickly on how the CEO and other senior executives deal with individuals and situations that may not conform to the ethical code. The board also has something at stake: it is the responsibility of the total leadership, including the board, to infuse an organizational culture of ethics, and this challenge includes communicating effectively.

Corporate ethics officers want us to be aware that some executives need to learn how to talk about ethics. It is not that they are unethical individuals – rather they may not be fluent in the language and organizing concepts that inform the field of business ethics.

Interesting issues relate to the helpline. Who are the people answering these calls? How knowledgeable are they, and in what fields? Clearly they must be able to understand a caller’s situation and knowledgeably relate it to the ethics code. In today’s world they may also need a working knowledge of financial reporting and accounting issues.

Companies must ensure that the people fielding such calls have in place a rational process to resolve the issues raised by callers. Will they go to senior management, to in-house counsel, to auditors, to the board? Employees will not call if they doubt that adequate action will be taken.

Measuring the effectiveness of ethics programmes is difficult. It is impossible to measure bad things that did not occur because an ethics programme is in place and functioning well. However, there are measures worth gathering: statistical and anecdotal views of hotline/helpline experience and employee perception surveys are among the most helpful.

Private ethics: the core of corporate integrity

To look more closely at the issue of private ethics in the business arena, we might consider the ethical responsibilities and potential dilemmas of the board of directors.

Although differing governance models around the world create a wider range of challenges than those I highlight, the basic requirements of integrity, knowledgeability and courage are transnational.

In the past, and still today, boards often appear to operate like clubs of congenial peers. However, after Enron, WorldCom and other corporate calamities in which the judgment or oversight of the board has been sharply faulted, should the board still be viewed as a congenial club of like-minded individuals?

On the basis of what I have witnessed in the past year, there has been a significant change. Board members now know that they must strike a balance. As before, they need to be collegial. But if there is a problem, effective directors recognize that they must speak out. And they are more likely to find other directors who will support this outspokenness.

Directors are now more likely to speak to each other privately than they were even a few years ago. In the past, if a director had an issue, he or she was unlikely to talk it through privately with another director. Now there is an emerging trend for a director with an issue to call another director to explain matters and seek support or clarification.

There continues to be no desire to embarrass the CEO in the boardroom – but there are more private meetings of independent directors, and the New York Stock Exchange will soon require such private meetings among independent directors.

When board members do not take the time to understand fully decisions they are asked to approve, they can create difficulties for the future. Naturally, no one wants to appear unprepared or poorly versed in a technical business area, and so board members are apt to rely on those (generally senior management) who appear to be knowledgeable.

It takes courage to say, “I don’t fully understand.” For example, a CFO from another company who sits on a board to which management is recommending a complicated treasury function may be afraid to ask for clarification – afraid of “losing face” with other board members. In and of itself, this lapse is understandable. But in a governance context it allows private fear to rule where rigorous oversight on behalf of shareholders and public trust is needed.

The profile of boards is changing. In the past, the chairman-CEO typically had either active or retired CEOs on the board because the chairman felt that they had the right background to understand corporate issues and take a sympathetic view of CEO decisions. In addition, they were likely to take a sympathetic view of the CEO’s compensation requirements.

Today, CEOs remain important candidates for boards but the reasons for this are changing. For example, executive search firms that recruit directors now tend to use a decision-support matrix. Down one side will be the names of directors already on a board, and across the top will be the attributes, knowledge base and skill sets the board now needs. There is a growing trend to recruit directors who bring specific skills and experience such as expertise in economics, technology or international business. They may well be CEOs, active or retired, but first and foremost they will bring certain values to the table.

One of these values is a good understanding of the transformational nature of many of today’s companies. In energy, telecoms, insurance and health care, for example, companies are quickly evolving, entering new businesses and industries, exiting others. Should the composition of the board change as the nature of a business greatly changes? Arguably, the answer should be “yes”.

Boards must understand how money is being made and how it is being used. If boards do not understand the transformational nature of the businesses they oversee, how likely are they to know whether performance measures, investments and returns make sense?

Executive compensation

The compensation committee of the board of directors has a key ethical responsibility. Compensation systems play a large role in tempting the weak.

The compensation committee is responsible for ensuring that compensation programmes do not in any way encourage executives to put their self-interest ahead of the interests of shareholders and other stakeholders.

When stock options are used in compensation, managers should only be rewarded for delivering real and exceptional performance that endures over the long term. There are various ways of structuring this approach, such as stretching out the vesting period or requiring “clawbacks” if the stock declines rapidly over a short period of time.

How can a company ensure personal integrity? In truth, it cannot – if “ensure” means achieving uniformly high ethical standards among all managers and employees. By the time people enter their professional careers, their personal ethics have largely been shaped. However, their ethics can be reinforced by the corporate culture or, conversely, strained and ultimately shattered by a corporate culture that respects no limits.

Some companies have even adopted a values-based hiring system to ensure that only those who share their values are given offers to join. “Behavioural due diligence” at the point of hire can spare much difficulty later on.

Too many companies put almost all the emphasis on performance, and relatively little stress on the integrity with which high performance is achieved. Yes, performance matters. But acting with integrity matters more.

The Ethics Resource Center employee survey

Published in 2000 and soon to be updated, the Business Ethics Survey produced by the Ethics Resource Center in Washington, DC, sheds a strong light on employee perceptions of ethics in the workplace. It illustrates the fact that well-structured codes and systems and even a strong corporate culture all face challenges.

The survey endorses many of the points I have made in this article and puts metrics around some of the challenges. For example, it reports that one-third of all US employees have observed misconduct at work in the past year, and that more than two in five employees who observe misconduct do not report it.

The survey goes on to indicate that roughly a third of employees who observe misconduct fear retaliation by management and their co-workers if they report it. On the other hand, 80% of the participants in survey say they view ethics as important in choosing to stay with their organizations.

I introduce these mixed and in part disturbing statistics so that the topic of private ethics and corporate integrity may remain alive and unresolved for readers of this magazine, many of whom are responsible for large or influential enterprises.

We need to remember that integrity and courage are inextricably linked. Both are needed at all levels of an organization that intends to serve its shareholders and stakeholders and, with no less clarity, to respect the public interest.

Samuel A DiPiazza
Samuel A DiPiazza Jr is global chief executive officer of PricewaterhouseCoopers.