Introducing a series on what ethics and compliance professionals should do to strengthen the ethics and compliance oversight and leadership of their Boards of Directors.
“Do businesses’ duties to make shareholders money prevent them from pursuing social impact goals?” asked the headline in a recent New York Times Op-Ed series on “do-gooder” companies, sparked by the IPO of the internet craft retailer Etsy. It is essential for Ethics and Compliance professionals to understand the debate, and their roles in helping boards govern in this environment.
There is ongoing contention in the United States about what it means to represent shareholder interests. To oversimplify: one side of the debate echoes Milton Friedman in the 1960s, saying the sole responsibility of a corporation is to maximize profits for its shareholders. Since the Board acts on behalf of shareholders, they must act to maximize profits. End of story.
The opposing side says that companies can have a variety of legitimate purposes, and should incorporate consideration of the perspective of key stakeholders, such as employees, suppliers, customers and the public. Board members who live up to “the business judgement rule”, acting with due care (such as being appropriately informed) and due loyalty (including avoiding personal conflicts of interest) are fulfilling their obligations.
There is increasing rigorous evidence that this is a disagreement without ramifications. Recent research published in Harvard Business Review finds that “firms with good performance on material sustainability issues significantly outperform firms with poor performance on these issues, suggesting that investments in sustainability issues are shareholder-value enhancing.”
Other research out of the University of Chicago on corporate culture finds that firms where “employees perceive top managers as trustworthy and ethical” exhibit stronger financial performance.
In this age of instant information, doing the right thing for one’s stakeholders leads to doing well for one’s shareholders in the long term. The reputational cost of irresponsible behavior leads to diminished shareholder value, at least in western economies with some semblance of a free press/internet and the rule of law.
Therefore board members, as part of their fiduciary responsibility on behalf of all shareholders, must pay attention to the ethical and reputational implications of a Company’s operations, not just the financial ones. This is true regardless of which side of the “what are the responsibilities of a corporation” argument one aligns with.
In the United Kingdom, the linkage between corporate responsibility and the responsibility of the board member is made explicit in the law. Under the UK Companies Act, the fundamental duty of the board member is “to act in the best interests of the company.” One of the key tests as to whether the board member is acting in the best interest of the company is this: directors must consider the impact of decisions on the firm’s “reputation for high standards of business conduct.”
The implications of the linkage between ethics and financial performance for E&C professionals are vast. They must identify business practices and cultural issues that threaten the internal and external ethical reputation of the firm and implement practices that reduce risks from unethical practices and strengthen cultures of integrity. This includes communicating risks, practices issues and responsibilities to Board members and leaders.
Please email [email protected] with your questions on what ethics and compliance professionals should do to strengthen the ethics and compliance oversight and leadership of their Boards of Directors.