Ethics Warning Signs To Look For

Ethics Warning Signs To Look For

The topic covered by Issue 5 of The Bulletin is “The Code of Conduct – Laying a Cornerstone for Effective Governance.”  This issue discusses the importance of setting the tone at the top, defining a code of conduct, communicating and disclosing the code, broadening the focus of the code and reinforcing the code. The article concludes with a reference to vital signs that directors should keep an eye on.  The cover of Issue 5 includes a sidebar listing these signs. Following is an expanded explanation of these vital signs.

  • The extent to which the code of conduct is emphasized and reinforced by management in operating the company - There is little value to a code that is published but not regularly reinforced by management.
  • The manner in which management engages the board - Management’s relationship with the board could be a sign of how it engages its people.  For example:
    • Management only brings good news and highly structured presentations to its meetings with the board.  The board rarely hears bad news until it is too late.
    • Management only presents plans to the board for approval and rarely seeks input or advice as plans are being developed. Insufficient time is devoted to forward- looking issues.
    • The CEO controls the board’s agenda, board meetings are highly regimented and orchestrated, and directors have little opportunity to discuss issues and concerns.
      If these signs exist, are they an indicator of how management works with subordinates, e.g., the CEO doesn’t really listen to his or her people? If so, does that behavior permeate the organization?
  • The existence of circumstances within the organization or aspects of its culture that could lead to unethical or dysfunctional behavior - Most business environments are demanding.  Unless effectively managed and checked, past successes and growth along with sustained pressures to perform can breed a “warrior culture” and a cavalier attitude that spawns reckless initiatives, unhealthy internal competition, institutional resistance to bad news, a general lack of change readiness, unrealistic stretch sales and profit goals, variable compensation plans linked to those goals, and lack of particular attention to protecting the company’s brand image.  If downsizing initiatives lead to middle managers having to do more with less -- with no refinements to internal processes -- and that result is ignored by management, important internal controls can be stripped away and employees can be tempted to “cut corners” and act in an unethical manner. If management is driven by unsustainable market expectations, the emphasis on managing earnings for short-term results can lead to the generation of sales or earnings at any cost.
  • The existence of direct or anecdotal evidence that the CEO and senior management lack credibility with employees - Such evidence might surface in employee surveys conducted by an independent consultant. It also can surface in other ways. Management may consistently make excuses for poor results and are unwilling to acknowledge their own errors in either strategy or execution. If the board notes that the CEO and executive management are unable to discern or are unwilling to admit when a strategy is not working or when execution of the strategy is obviously failing, it can safely bet that employees have noted it as well. A lack of management credibility within the organization can lead to immediate and lasting undesirable effects, including the loss of talent.
  • The existence of direct or anecdotal evidence that certain business activities might be on the verge of running out of control - For example, is there evidence of a pattern of high-pressure sales practices, bullying negotiation tactics, disregard of regulatory authority and other similar activities? If these conditions persist unabated, could they lead to problems, even illegal acts or brand erosion, down the road?
  • The identification of problem areas or process failures that may be a symptom of a potential ethics issue - When a significant problem or process failure occurs, is it a symptom of an ethical breakdown? If not, does it indicate a lack of clarity that, if addressed, might have helped to mitigate the problem or even have avoided it altogether?
  • Requests to waive conflicts of interests or other significant ethics requirements - The board should pay close attention to requests from management to waive significant provisions of the code, including the immediate and long-term effects if a waiver is granted.
  • The effectiveness of management’s follow-up on instances of code violations and noncompliance issues reported by “whistleblowers” and third parties - The board should be informed of matters related to financial reporting raised by “whistleblowers” as well as the identification of lack of adherence to policies and procedures by regulators and auditors. The investigation of such matters, the conclusions reached and the remedies taken should be disclosed to the board.

Success achieved at any cost does not lead to sustainability. If a combination of these and other “red flags” are noted, the board should investigate them to determine whether there are integrity issues that require particular attention at the highest levels of the organization.  Where there is smoke, there may be fire.

The Bulletin (Volume 1, Issue 5 Supplement)

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