Directors' guide to ethics in the boardroom

A new AICD and The Ethics Centre guide helps directors navigate moral judgements and ethical issues in boardroom decision making.

With an increasing focus on the ethical implications of board decisions, the AICD and The Ethics Centre have released Ethics in the Boardroom: A decision-making guide for directors.

Ethical issues vary in scope. Some relate to organisational matters, such as conflicts of interest. Others are of broad societal concern, such as how to respond to climate change. “There is a growing focus on the ethical implications of board decisions and high expectations of ethical conduct and practice from stakeholders, regulators and directors themselves in the context of sweeping structural changes in technology and community concerns with equity,” says AICD managing director and CEO Angus Armour FAICD.

Rather than focus on the ethical obligations of directors, the new guide aims to support directors as they navigate the intricate ethical terrain encountered in every boardroom. It does not attempt to prescribe a set of rules for good conduct. Instead, it aims to complement and inform the good judgement that directors bring to their deliberations. The guide invites directors to view ethics through four different lenses (see breakout BELOW). These can be used when considering ethics generally, or applied to specific ethical issues and dilemmas arising in the boardroom.

Dr Simon Longstaff AO, executive director of The Ethics Centre, notes in the foreword to Ethics in the Boardroom that the ethical landscape traversed by company directors “has always been complex”.

“They are legally bound to act in the best interests of the company as a whole,” continues Longstaff. “Ethics both informs the law and goes beyond its limits. For the most part, law sets boundaries for what may or must be done. Ethics concerns what should be done — even if not required or prohibited by law. Directors will often seek legal advice about what can be done. Whether or not to approach or cross the limits of the legal ‘envelope’ of possibilities is an ethical question. The fact that something can be done does not mean that it should be done.”

The guide reminds directors that fiduciary and statutory duties should be paramount in board decision-making. These include the duty of directors to act in good faith, for a proper purpose and in the interests of the organisation as a whole, operating with care and diligence. Directors must not misuse their position and should avoid conflicts of interest and disclose material personal interests. Directors must also comply with further directors’ duties applicable to their organisation and sector.

Ethical issues do not necessarily come flagged as such. For example, there can be an ethical dimension to issues of capital allocation, new product approvals, and the development of key strategic partnerships. The four lenses are helpful in revealing the range of ethical issues that can be embedded in a decision that comes before the board. It is also important that directors have access to a reliable and replicable process for decision-making. The report includes a model to meet that test. There are five steps in this process and each has a series of questions to assist in decision-making.

1. Frame Define and understand the precise nature of the issue to be decided.
2. Shape Develop options that could resolve the issue. Some of these options will have been developed by management, others by directors
3. Evaluate Apply a matrix of values and principles to evaluate the options.
4. Refine Identify and eliminate weaknesses in the proposed course of action.
5. Act Give effect to a decision.

The four lenses

Directors can use these when considering ethics generally or apply the lenses to specific ethical issues and dilemmas that can arise in the boardroom.

1. General influences What aspects of the organisation’s strategic environment are relevant to the decision?
   • Are there factors that lie beyond the scope of the board papers? What is the connection between this choice and the long-term prospects of the organisation?
   • Whose interests deserve to be taken into account? What are their interests? To what extent are those interests aligned?
   • How do we wish to position the organisation? As a leader on such matters? As a close follower? Doing the minimum required by law or regulation?
2. The board’s collective culture and character Does the board as a whole have a culture that enables and supports ethical considerations, including calling on the organisation’s ethical framework?
   • To what extent is the decision before the board clearly linked to the organisation’s purpose, values and principles?
   • What impact will the board’s decision have on the culture of the organisation?
   • Is the board’s decision framed in language that will resonate within the organisation?
   • Where are the potential “ethical blind spots” on the board? For example, is the proposed course of action being recommended for no better reason than “everyone does it”?
3. Interpersonal relationships and reasoning Have you considered how group dynamics impact on board discussions, including how your own default decision-making style fits in?
   • Is there too comfortable a drift towards agreement? Or is there an active effort to promote and manage diversity, and recognise and encourage differences of perspective?
   • Are the opinions of some directors too easily dismissed because they are not “subject matter experts”? Are the opinions of some directors given too much weight because they are subject matter experts?
   • Does the board identify and question the assumptions on which recommendations are based? Are directors given the time and opportunity to offer critiques of their own arguments?
4. The individual director Is each director aware of their personal ethical position?
   • Do your personal values and principles align with those of the organisation?
   • Do you understand your own motivations and biases? How would your motivations look from an external perspective?
   • Do you recognise your own preferred style of decision-making? Are you open to different approaches?
   • Are you able to recognise and declare when you are “out of your depth”? If so, have you sought counsel (if appropriate)? Are you prepared for potentially difficult debate?

Ethics in the Boardroom

The guide is based on insights from The Ethics Centre and draws on the experience of AICD members, and other subject matter experts, who participated in interviews and roundtable conversations. It was assisted by members of the AICD’s advisory panel — Lynn Ralph FAICD (chair), Melinda Conrad FAICD, Bruce Cowley FAICD and Dr Sally Pitkin FAICD.

The insights presented in the document have been distilled from interviews and roundtable discussions with experienced directors and subject matter experts, including senior academics and board advisers. The focus is the boardroom — the ultimate source of the ethical tone that flows throughout a well-governed organisation.

The guide also includes case studies and examples.

It can be used as a general resource for directors, to identify specific areas for strengthening a board’s capacity in relation to ethics, and to inform conversations about the ethical dimension of complex issues encountered by individual directors or the board as a whole.

Read our guide to ethics here and how to set an ethical compass here.

Exercising ethics

Applied ethics skills will become an important board tool as business complexity grows.

Predicting the future of business is rife with complications. Few foresaw Donald Trump becoming US President, Brexit or the global financial crisis and tech crash. If the events that shape business and governance are hard to predict, how can boards prepare?

A better approach is extrapolating current governance trends into the future and understanding how boards might have to adjust to rising community expectations on business behaviour and ethics. Powerful forces that are influencing boardroom ethics will only grow.

The AICD’s Governance Leadership Centre recently asked ethics experts about the direction of governance and ethics over the next 10 years.

Dr Petrina Coventry FAICD — a professor at the University of Adelaide, non-executive director, business ethicist and private-equity partner — expressed the following view:

Character reference

Between now and 2029, there will be greater focus placed on character and background when making director appointments. Choosing a director based on skills and experience — or who is known to other directors on the board — will not be enough. Boards will have to consider a director’s character as well as their ability to govern through complex ethical issues, before their appointment.

Activist stakeholders will make more aggressive “calls” on a director’s individual and a board’s collective virtues during their tenure. It’s a bit like the Wizard of Oz syndrome: stakeholders will want to know much more about the people behind the screen (directors); not just their skills and CV, but their view on the world, evidence of moral character and ability to make complex ethical decisions. Stakeholders will test that the director’s ethical position aligns with the organisation’s purpose.

Directors will increasingly need education in the area of applied ethics. It will not be enough to assume directors are equipped to make ethical decisions, given rising complexity in business. Boards will need new tools, frameworks and, at times, external advice to help them understand how to interpret and respond to decisions involving a multitude of stakeholders with different needs. They will need to view applied ethics as a core skill.

More board decisions will be made on an ethical basis — companies acting in the right way — rather than just following the law. Too often, when companies face complex ethical decisions, their response is to wheel in the lawyers and adopt a compliance approach. They do what the law requires, even though the law often lags community expectations and ethics. The law can often be out of date or wrong.

Boards will recognise that if they continue to follow the low road (compliance) rather than the high road (having the character to do the right thing) their organisation will not be maximising value for stakeholders.

Also, due to the rapid and mercurial nature of changing technology and societal implications, there will be more focus on “existential ethics” in the boardroom in the next 10 years. Boards will be challenged to face up to their organisation’s responsibility to society and the planet, and directors will increasingly be viewed as keepers of their company’s moral code and character.

There will be tougher career consequences for poor ethical behaviour. Some industry associations and professional bodies will take a harder line; ethics will play a greater role in who they admit and whether they retain their membership. We will see people “struck off” from industries for poor ethical behaviour, as happens in medicine and law.

The big unknown is what will happen during the next decade if organisations continue to have serious ethical failures and what that means for boards. If boards cannot govern their company’s ethics to the standard required, regulators might do it for them. It might be that an organisation, led by regulators or an industry association, appoints full-time directors to boards, monitors their governance performance and professional development, and rotates directors across boards.

There are obvious complications and challenges with this model, but the only way to get true “independence” on boards, that aids ethical thinking and better diversity, might be for someone else to appoint and monitor directors — and for those directors to move between organisations after a few years. We are already seeing regulators in Australia and overseas taking extra interest in board performance and that will continue if ethical failures are recurring.

We might find as organisations grow and ethical decisions become more complex, that having part-time directors on boards, is no longer sufficient to address governance challenges. At a minimum, we’ll see directors holding fewer board positions in the coming decade.

Edited excerpt from Four expert views on the future of governance and ethics — AICD Governance Leadership Centre.