Ethics Culture & Corporate Governance


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Relationship between ethical dimensions of a firm and its active culture as well as their influence on corporate governance therein.

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Ethics Culture & Corporate Governance

  1. 1. Ethics, Culture & Corporate Governance Dr. Elijah Ezendu FIMC, FCCM, FIIAN, FBDI, FAAFM, FSSM, MIMIS, MIAP, MITD, ACIArb, ACIPM, PhD, DocM, MBA, CWM, CBDA, CMA, MPM, PME, CSOL, CCIP, CMC, CMgr
  2. 2. Learning Objectives At the end of the course, participants should be able to do the following:  Explain the relationship between ethics and culture  Identify various perspectives of values in corporate governance  Develop and implement fitting culture transformation  Draft standard code of ethics  Implement corporate governance structure which is effectively aligned to ethical culture
  3. 3. “Ethics is defined as disciplined dealing with what is good and what is bad and what are moral duties and obligations.” - Ranjana Kumar
  4. 4. “Organisational culture is a set of values, symbols and rituals shared by the members of a specific organisation, which describe the way things are done in order to solve managerial problems, both internal ones and those related to clients, suppliers and the business environment.” - Llopis, Gonzalez & Gasco
  5. 5. “Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders, and other stakeholders and spells out the rules and procedures for making decisions in corporate affairs. By doing this, it also provides the structure through which the company objectives are set and the means of attaining those objectives and monitoring performance.” Source: Organisation for Economic Cooperation and Development
  6. 6. Perspectives of Corporate Governance
  7. 7. The Shareholding Perspectives This perceives corporate governance in terms of issues relating to shareholder protection, management control and the principal- agency problems of economic theory. Examples of the shareholding perspectives: 1. Inherent Property Rights Theory 2. Agency Theory 3. Stewardship Theory 4. The Finance Model 5. The Myopic Market Model
  8. 8. Inherent Property Rights Theory It insists that a company is a corporate property and should be seen as aggregation of individual rights under a collective name, united by contract and protected by company law. The directors and managers as agents of shareholders have no legal obligation to any other stakeholder.
  9. 9. Agency Theory This highlights the need to control the agents’ self-interest behaviour in principal-agent relationship, so as to ensure that the social contract aligns the behaviour of agents with interest of owners/principals. Hence, it calls attention to the relationship between agents’ behaviour and outcome (profitability).
  10. 10. Stewardship Theory This criticizes problems envisaged by agency theory and asserts that managers have a wide range of motives beyond self interest such as achievement, recognition, responsibility needs, intrinsic satisfaction, pleasure of successful performance, respect for authority, social status and work ethics. Thus separation of ownership from control actually empowers managers to exercise unencumbered authority and responsibility, thereby promoting maximization of corporate profits and shareholders value while developing the managerial profession.
  11. 11. The Finance Model This is also known as efficient market model and refers to the presupposed optimum of market- based governance promoted by financial economists, using financial economic theory which holds that share price today fully reflects the market value of all future profits and growth that will accrue to the company. It claims shareholders interests are best served by maximizing share-price in the short-run because the share-price is an indicator of corporate performance and the stock market is the only objective evaluation of management performance.
  12. 12. The Myopic Market Model This stands against the excessive concern for short-term performance because of tendency to sacrifice long- term value and competitive capacity such as R&D. It points out that the stock market is not a good indicator of corporate performance due to its inability to cope with uncertainties; thus assets are usually mispriced and prices of shares often change without corresponding change in the fundamentals. Besides, share prices may be driven by guesses, changing moods and prejudices of investors rather than estimates of corporate fundamental values. For that reason, the myopic market model holds that corporate governance should encourage shareholders and managers to share long-term horizons.
  13. 13. The Stakeholding Perspectives This views corporate governance as the heart of both a market economy and democratic society. Examples of stakeholding perspectives: 1. Social Entity Theory 2. The Pluralist Model 3. The Trusteeship Model
  14. 14. Social Entity Theory The social entity theory opposes the inherent property rights theory because it does not view a firm as a private association united by individual rights, but as a public association formed through political and legal processes and a social entity for pursuing collective goals wit h public obligations. It perceives a firm as a social institution in society based on the grounds of fundamental value and moral order of the community. It holds that corporations are granted by the state not only as economic entity for commercial purpose, but as a social entity for general community needs. The corporation has a collective, rather than individual identity, and executives function as representatives and guardians of all corporate stakeholders interests.
  15. 15. The Pluralist Model It holds that corporate governance should not move away from ownership rights, but that such rights should not be solely claimed by shareholders; it should be claimed by other stakeholders especially the employees. Whereas social entity theory validates the interests of stakeholders on two factors namely fundamental human rights and moral value, the pluralist model insists every stakeholder has ownership right.
  16. 16. The Trusteeship Model This model points out that a company is an independent entity different from its members, and has its assets, rights, duties, will and capacity to act; and the managers should act as trustees whose fiduciary duty is to uphold the firm’s assets comprising the shareholders wealth, expectation of government, capability of employees, customers, suppliers, distributors and demands of community and ecosystem, as well as other concerns of the firm.
  17. 17. The Processual Perspectives The processual perspective views corporate governance as an emergent pattern of dynamic governing processes, actions and activities in specific social and historical contexts, rather than as any end-state and outcome of activities and pre-defined abstract forms such as shareholding or stakeholding, market or hierarchy, self- interest or altruism, self-regulation or state intervention. It holds that there’s no one static feasible model of corporate governance that can work everywhere, but insisted that its structure should be dynamic and dependent on evolutionary factors (time of entry into industrialization and institutionalization), political factors (influence and regulation of state along with business rules), and institutional factors (social organisation of state elites).
  18. 18. “Currently there is move within the field of organizational ethics that has the potential of destabilizing the central position that codes of ethics have played thus far in the governance of corporate ethics. This move has been triggered by an acknowledgement by both political and corporate leaders that a too strong focus on codes of ethics and their implementation can give rise to a compliance mentality that does not translate into deep cultural change in organisations.” - Deon Rossouw
  19. 19. Evolution of Ethics Ethical norms are usually developed from different conceptions of human beings influenced by their nature. The two products of such conceptions are as follows: 1. Rule based cultures 2. Relationship-based cultures
  20. 20. Rule-Based Cultures 1. Equality of status for rational individuals. - Ethics of Equality - Ethics of Justice - Ethics of Rationality - Ethics of Human Rights 2. Equality of authority. - Rules must be plain and all-inclusive - Obligation to rules and not to persons
  21. 21. Relationship-Based Cultures 1. People are parts of groups and societies. - Family - Social Groups - Associations - Community - Ancestors - Whole World 2. Ethics of care - Individual interests are key factors - Human rights and justice are minor issues
  22. 22. The active culture of an organisation could be adrift divergently from its corporate ethical standards, thus discarding the elements and direction of established ethical values The Dilemma of Redundant Ethics
  23. 23. Ethical deficit occurs when the character of individuals in an organisation and the corporate character are both diverging from the standard ethical values. Ethical Deficit
  24. 24.  Respect  Responsibility  Results Source: George S. May International The Three R’s of Business Ethics
  25. 25. Implementing Culture Transformation  Establishment of strategic plan for using ethical values to steer individual conduct  Establishment of cross-functional team  Organisation-wide campaign for buy-in of all and sundry and execution of joint culture building  Structured learning encapsulated in multi-modular development  Integration of ethical values into internal service delivery system and performance expectation  Culture embedded on individual leadership and conduct  Continuous monitoring and evaluation
  26. 26. George Legault Model of Joint Culture Building George Legault proposed that joint culture building in the whole organisation provides opportunity for ethical values to become embedded on individual and team conducts. He claims it promotes actions and decisions based on shared meaning and requires the following for successful implementation: i. Articulation of values ii. Management by values iii. Conflict resolution and shared decision-making iv. Individual decisions
  27. 27. Code of Ethics A code of ethics is a blueprint for developing a culture of values in an organization. A code consists of a clearly stated and written set of guidelines that managers, employees, and agents of an organization must follow. A code of ethics is a reference tool that provides guidance to both employees and managers on how to implement and practice business ethics in the workplace. A code should embody both business standards (such as customer satisfaction, a high quality of products, safety, and employee rights) and values (such as mutual trust, respect, and honesty). Source: Glossary of Corporate Governance
  28. 28. Eight Steps for Preparing a New Code of Ethics i. Get endorsement from the Board ii. Find a Champion iii. Understand the purpose iv. Find out what bothers people v. Be familiar with external standards and good practice vi. Monitoring and assurance vii. Try it out first viii. Review Source: Institute of Business Ethics
  29. 29. Content of Code of Ethics Introduction (signed by the Chairman or Chief Executive Officer or both) The Purpose, Values and Impacts of the Business  A. How to use this code  B. Employees  C. Customer Relations  D. Shareholders or other providers of money  E. Suppliers Prompt settling of bills  F. Society or the wider community  G. Implementation and reinforcement  H. Assurance, reporting and reviews Key ethical issues to include  How we compete  Bribery and facilitation payments  Gifts and entertainment  Conflicts of interest  Use of company assets  Safeguarding important information  Political involvement and contributions  The application of human rights standards in our business  Our environmental responsibilities  Timely payments of suppliers  Other issues Source: Institute of Business Ethics
  30. 30. Corporate Code of Ethics Corporate Ethical Culture 1. Act-centered approach Agent-centered approach 2. Focus on individual Focus on individual, team and the whole organisation 3. Operational engagement hinges on acceptability or non-acceptability of individual behaviours Operational engagement hinges on evolving character of employees and the organisation
  31. 31. Sama and Shoaf Corporate Governance Structure Enforcement Agencies Accounting Standards External Auditors Boards of Directors Corporate Executives Corporate Employees
  32. 32. Petrovic-Lazarevic Model of Corporate Governance Structure Enforcement Agencies Accounting Standards External Auditors Boards of Directors Corporate Executives Corporate Employees Board Social Responsibility Committee Corporate Environmental Culture/ Ethical Principles Environmental Policy Community Government
  33. 33. Ezendu Model of Corporate Governance Structure Enforcement Agencies Accounting Standards External Auditors Boards of Directors Corporate Executives Corporate Employees Board Ethical Culture Committee Corporate Ethical Culture Ethics Policy Community Government
  34. 34. 1. They are strong communicators – with excellent and effective communication skills, including public speaking, presentations and one-on-one interactions with employees at all levels. 2. They are objective and thoughtful. 3. They have the ability to establish and maintain credibility and trust throughout the organization. 4. They have the ability to quickly assimilate information relating to complex issues. 5. They have the ability to network on all levels of an organization. 6. They have reached personal and professional maturity. 7. They show rationality in tense interpersonal situations. 8. They have a deep organizational knowledge. 9. They have a working knowledge of applicable laws and regulations. 10. They have experience with training and development including best practices in ethics and compliance education. 11. They have solid, broad management skills. 12. They are discreet and able to protect confidential information. 13. They are able and willing to take a difficult or unpopular position if necessary. 14. They have common sense. 15. They always show the highest integrity. Source: Ethics Officer Association Characteristics of Ethics Officers
  35. 35. “The character and behaviour of employees of any organisation will dictate whether that organisation can claim to be ethical or not. It follows that processes used in staff appointments and management will contribute to the extent to which an organisation conducts its business and displays ethical behaviour.” Source: Santam
  36. 36. “Transparency means that the public can see a company’s true financial position or security posture without distortions and, therefore, can trust financial and investment information available to the public. Investments in internal control systems are necessary, but insufficient to assure the integrity of financial reporting. Organizations must look beyond the quality of the internal control system to the quality of the individuals responsible for implementation. There must be a good fit between individuals and the ethical and corporate climate of the organizations in which they find themselves working.” - Kermis & Kermis
  37. 37. Example of Ethical Deficit in Governance “Madoff's clients had considered themselves fortunate members of an elite investing circle, centered in New York City and Palm Beach, which provided them with steady returns regardless of how the market fared. Now their common bond is disbelief that it was a fraud. A great irony of this massive fraud was that Madoff had campaigned for greater transparency in NASDAQ and he will ultimately be charged with fraud and losing billions for innocent investors through his culture of deceit.” Source: Wall Street Journal, 2009.
  38. 38. Case Study Santorem Patori is a multinational firm that operates in Europe, Middle East, North America and Africa. The Chief Executive Officer was involved in malfeasance which dragged the corporate reputation of the firm down the ladders. Due to organisational restructuring, you have just been employed as the firm’s Head of Human Resources. The new CEO requires you to develop a feasible framework for building and fostering corporate ethical culture in the whole organisation. Prepare a well articulated response.
  39. 39. Dr Elijah Ezendu is Award-Winning Business Expert & Certified Management Consultant with expertise in Interim Management, Strategy, Competitive Intelligence, Transformation, Restructuring, Turnaround Management, Business Development, Marketing, Project & Cost Management, Leadership, HR, CSR, e- Business & Software Architecture. He had functioned as Founder, Initiative for Sustainable Business Equity; Chairman of Board, Charisma Broadcast Film Academy; Group Chief Operating Officer, Idova Group; CEO, Rubiini (UAE); Special Advisor, RTEAN; Director, MMNA Investments; Chair, Int’l Board of GCC Business Council (UAE); Senior Partner, Shevach Consulting; Chairman (Certification & Training), Coordinator (Board of Fellows), Lead Assessor & Governing Council Member, Institute of Management Consultants, Nigeria; Lead Resource, Centre for Competitive Intelligence Development; Lead Consultant/ Partner, JK Michaels; Turnaround Project Director, Consolidated Business Holdings Limited; Technical Director, Gestalt; Chief Operating Officer, Rohan Group; Executive Director (Various Roles), Fortuna, Gambia & Malta; Chief Advisor/ Partner, D & E; Vice Chairman of Board, Refined Shipping; Director of Programmes & Governing Council Member, Institute of Business Development, Nigeria; Member of TDD Committee, International Association of Software Architects, USA; Member of Strategic Planning and Implementation Committee, Chartered Institute of Personnel Management of Nigeria; Country Manager (Nigeria) & Adjunct Faculty (MBA Programme), Regent Business School, South Africa; Adjunct Faculty (MBA Programme), Ladoke Akintola University of Technology; Editor-in-Chief, Cost Management Journal; Council Member, Institute of Internal Auditors of Nigeria; Member, Board of Directors (Several Organizations). He holds Doctoral Degree in Management, Master of Business Administration and Fellow of Professional Institutes in North America, UK & Nigeria. He is Innovator of Corporate Investment Structure Based on Financials and Intangibles, for valuation highlighting intangible contributions of host communities and ecological environment: A model celebrated globally as remedy for unmitigated depreciation of ecological capital and developmental deprivation of host communities. He had served as Examiner to Professional Institutes and Universities. He had been a member of Guild of Soundtrack Producers of Nigeria. He's an author and extensively featured speaker.
  40. 40. Thank You