…designing and implementing corporate governance structures are important, but instilling the right culture is essential’
Economist Intelligence Unit 2002

Are the decisions we make in organisations true to the values and brand that we promote, and on which our reputation is based? Are we confident that, deep down, we believe the numbers that we see? At ER Consultants, we don’t believe that we can have true corporate governance unless it is underpinned by a culture of integrity. In this article, Mark Goodridge explores how we can go about developing that culture.

Corporate governance ‘…is the system by which business corporations are
directed and controlled’ oecd ¹

The ‘Governance’ word covers many pages daily. Under the fading business boom, shareholders have suffered as promises have not been delivered. Executive remuneration is seen to continue to soar, seemingly untroubled by the lack of delivered performance. And much attention – quite rightly – has been focused on those who are accountable for business performance – the Chair and Board of companies. The dominant focus for addressing these issues has been the specification of Board composition, appointments, Board committees and
conflicts of interests – executive and non- executives alike. This is necessary but not, however, sufficient. It is only through creating an organisation with internal integrity that the Board can be confident that their direction is being followed and that the performance numbers they publish to the shareholders are accurate.

‘Trying to impose codes of conduct from the top down is doomed to failure’
Hans Wijers, Akzo Nobel Chairman

It’s all very well having lists of good conduct, portentous mission statements of values, and lists of good practice. This is an important face to the world. However, whilst, we can instruct Boards to behave differently, and tell them to instruct their organisations on issues of governance, the worry is that we end up with a tick-box mentality that conforms to the letter and little of the spirit.

Increasingly we see a disconnect within corporations between external governance and the effort being placed on what we call In this article ‘internal’ governance.

Figure 1 Disconnect between external and internal governance disconnect

Often the motivation for external governance is one of ‘face’ rather than one of an integral coherence in values. Understanding and managing risk, reputation, and performance, ultimately rests on how we can understand, and if necessarily change, the behaviour of individuals, teams and the organisation as an entity. This is the only way in which we can meet the claims of the external governance if we are to pay more than lip-service to the notion. There must be a connect between the external governance and the internal behaviours. None of this is unethical – but bit by bit, people are drawn into more complex situations in which they have contributed a small, but not insignificant role, and from which there becomes no escape.

In their approach to governance Lloyds TSB have strongly linked the two. They have adopted an enterprise-wide approach to risk management that clusters governance, people and organisation. They define governance as ‘the risk of loss from poor corporate governance at Group and business level, sub-optimal organisational structuring, or failure to recruit, manage and retain appropriate skilled staff to achieve business objectives’ [LTSB annual report 2002]

The drivers of integrity in the organisation

Much has been written on how businesses can comply with company law and codes of best governance practice. The new combined code (Higgs) incorporates the proposal of annual reviews of Board effectiveness and this for us is a key component of assuring Board integrity.

Businesses take on unnecessary risks if they fail to conform to the company laws
and codes of practice of the countries and regions in which they operate. However, ultimately, the risk for the shareholder and the company may be far greater if the organisation does not have integrity – if it does not behave in the ways in which the Board, and all in-house company communication,
expects it to behave. From our experience of working with many companies we have identified five sets of requirements to build the organisation of
integrity:

1. Explicit business direction goals and roles
2. Explicit values and ethics
3. Explicit policies and processes
4. A culture of integrity
5. Systems of internal control

Let’s examine each of these in more detail.

1. Explicit business direction, goals and roles

A clear business direction and definition of roles give a sense of overall purpose and this provides the context within which each individual and team accomplishes their role.

This provides one means for assessing whether employees’ actions are in the best interest of the company. Most organisations do this rather well.

What is less evident, but equally important is whether each individual team and unit have a strong and shared understanding of accountability – their own and those with whom they have to work to deliver the goals. This includes their authority to commit, authority to act and their responsibility to communicate openly.

Without a common overall picture of who does what it is really hard for individuals to see the context of their own role, however well defined that may be. This gives an initialclarity to the situation.

2. Explicit values and ethics

Values programmes within businesses have a chequered history. For many, they may signify charts on walls, cascades of sheep-dip workshops and a morning-after feeling that little has changed saved for the cost and time incurred. Changing behaviour takes a long time – an explicit code of conduct and ethics is but just the start. However, it is a necessary start. These then have to be translated into practical policies and processes which become embedded into the culture such that they become the commonly accepted way of working. Without this standard – a benchmark of the behaviours that are acceptable and those that are not – the journey to achieve integrity has no direction or compass. There is no possibility of a shared vision, if the values and ethics have not been determined.

3. Explicit policies and processes

Consider the following scenario:

The meeting lasted 35 minutes. By the time it was over, WorldCom’s Board of directors – who had been alerted at two hours’ notice and had received no written material and only the briefest of presentations – had unanimously approved a bid for a web hosting company costing $6bn.

This is one, speedy, way of making decisions. But is it safe? Here is the dilemma. Do we saddle the business with large quantities of rules and regulations or do we trust our staff to make the right decisions? In reality this is a trade-off between the density of our specifications (even assuming they will be read and implemented) or our investment in creating the culture of integrity. If we are confident in this culture, then we can allow more risk, and less rigidity around decision-making. The high level of trust that this implies allows for more creativity.

One of the questions we frequently ask at all levels in businesses is ‘Tell me how the organisation is supposed to work and how decisions get made’. Most often people don’t know – even very senior people. Few seem to have a picture in their minds of the various parts of the business, how they interact and who does what. Even more worryingly, such views as do exist are rarely shared. One of the strongest assurances for effective internal governance is the development of your own senior management talent that understands both direction and values and instinctively gives the leadership required. This means that our people are surrounded by policies and practices that we wish to inculcate in our people.

Further, effective performance management gives everyone clarity of goals and
regular feedback on their progress both with respect to the outcomes they achieve but also against how they behave and act. Rewards and incentives need particular attention. The performance management system in Enron was really effective; it aligned staff to behave in an inappropriate way and rewarded them handsomely.

4. A culture of integrity

‘Rather than issue an edict from the centre, Akzo has handed responsibility for its code of conduct to the people who run the individual businesses. They in turn have picked high-potential middle managers, who have been given a direct line to the chairman, to ensure that the group’s 67,000 employees are familiar with the principles.’
Hans Wijers Akzo Nobel Chairman (FT, July 2003)

Increasingly major companies like Akzo, are taking the culture of integrity seriously.
Culture change needs champions to set the example and lead teams towards different ways of working. Individual members of staff need to feel confident that they can ‘speak out’ about unacceptable behaviour without fear of reproach. Sometimes staff will not see the full picture and misinterpret behaviour;
others may falsely accuse, but the journey to achieving integrity will require experimentation and learning by both managers and staff alike.

Codes of ethics and conduct need to live. They need to become the unconscious competence of the business. They need to become embedded in the culture. Culture is hard to change but if we need to do so, we need to begin with understanding the current level of integrity within the organisation. We use an integrity barometer as a robust starting point for culture change.

5. Systems of internal control

To complete the picture of effective internal governance, we need to ensure robust systems of internal control. This includes finance, accounting, audit, risk committees and risk management. However, as with all other aspect of governance, if these just becomes means to satisfy compliance with externally imposed rules, you run the risk of placing ticks in boxes rather than really influencing the culture of integrity.

It is the responsibility of the executives of the company to develop and maintain organisational integrity. They should be accountable for its achievement to the Board. As the pressures to perform get ever greater, so too the temptation to take shortcuts and start to tarnish the integrity of the business. No one wakes up in the morning deciding to corrupt the organisation. Loss of integrity comes from an accumulation of individual actions, each stretching the truth and integrity a little further. Those executives who do not exercise great vigilance in ensuring that they build explicit measures of integrity into organisational development are running unnecessary and extremely dangerous risks.

¹ Organisation for Economic Cooperation & Development