When shareholders backed a protest vote last year over sexual harassment claims at the global technology giant Microsoft, it sent a clear message: a narrow focus on value is no longer enough to satisfy investors.
Microsoft is far from the only example. Companies are increasingly expected to shoulder wider ethical, social, and environmental responsibilities – and are being held to account by a combination of regulators, shareholders, and customer action.
So, how can organizations balance these new demands while continuing to deliver on financial performance?
Benefits of ethical governance
Ultimate responsibility for navigating ethical terrain falls with the Board – that is according to six in ten FT Moral Money readers, who say decisions on how to respond to social, political and moral issues should be made at Board level.
Indeed, this responsibility has become a core demand of good governance, alongside the more traditional legal, regulatory, and strategic responsibilities. To meet increasingly diverse expectations and to keep pace with competitors, it is therefore key to ensure a Board both values and delivers ethical governance.
Despite this, ensuring governance is ‘ethical’ is still an afterthought rather than a priority in many organizations, especially where ethics is viewed as a negative constraint on business.
Yet, delivered properly, an ethical approach is neither a ‘tick box’ exercise nor a set of restrictions on a Board’s freedom to make decisions. Instead, it is a system of governance which enables organizations to effectively identify, assess and manage all priorities, throughout all the structures and processes of an organization.
Rather than simply being a mechanism for addressing ethical challenges, ethical governance is a positive enabler which can improve all aspects of corporate governance: a Board which is engaged in ethics has both improved foresight of issues affecting the company’s long-term operating environment and greater capacity to oversee the organization’s response to complex challenges.
It is also empowered to identify, deliberate on, and effectively address complex and often conflicting demands, and to communicate the resulting decisions in a consistent, transparent manner that builds and maintains stakeholder trust.
All this delivers a significant competitive advantage in a world where more than a third of consumers believe businesses need to do more to address societal issues.
An ‘ethical’ Board is a strong Board
In an increasingly complex environment where multiple interests are at stake, there is often no single ‘right’ answer to the questions and challenges which are put before Boards. But ethical governance means Board members ensure all legitimate interests are represented, accept the inevitability of difficult trade-offs, and manage them fairly.
How can a Board do this? As a foundation, directors must equip themselves with the appropriate information and independence to identify ethical issues and engage with them.
An ethically-engaged Board should be formed of directors who reflect the diversity of stakeholder interests and who are comfortable debating across the table with someone from a different ethical perspective.
Directors should be equipped to judge whether views that conflict with their own are nonetheless ethically reasonable or express an unacceptable position – and act accordingly.
A Board which views ethics as key to its operation has a greater understanding of what good governance entails and ability to ensure it is delivered. This enables it to meet increasingly diverse and demanding expectations and, in doing so, deliver a competitive advantage.
About the author
Sopé Williams-Elegbe is a Senior Associate at Principia. She also serves as Professor and the head of the department of Mercantile Law at Stellenbosch University, South Africa.
About the author
Rob Hayward is Chief Strategy Officer of Principia, where he also serves as Engagement Director for key clients.