Corporate Governance - Part 3
Integrity and its part in corporate governance
Here we take an extended look at issues relating more to qualities relating to an individual and perspective board member than the board as a whole.
The board member has duties and responsibilities that extend further than just 'being a board member'. Personal integrity and responsibility play a major part in a board member's make up.
As a board member operates in an unstructured environment as distinct to an executive arena, a more disciplined and responsible role is required of a director than of an executive on a management role.
An executive arena is more structured and the executive has direct accountability to senior management and senior management to the CEO or Executive Director and he or she to the board. In a board position, although accountability and responsibility is shared with the other members of the board, the director still has a more autonomous role in many respects and consequently needs a higher level of integrity, discipline and responsibility to operate effectively.
Integrity and Responsibility
Integrity and responsibility pay a vital role in the arsenal of the Non Executive Director (NED).
The dictionary definition of integrity includes:
"adherence to moral and ethical principles; soundness of moral character; honesty. The state of being whole, entire, or undiminished. A sound unimpaired, or perfect condition."
Its origin is c.1450, "wholeness, perfect condition," from O.Fr. integritè, from L. integritatem (nom. integritas) "soundness, wholeness," from integer "whole" (see integer). Sense of "uncorrupted virtue" is from 1548.
Thomas McCauley defined integrity well when he said:
"The measure of a man's real character is what he would do if he would never be found out."
Integrity could be said to be the composite of a triangle, one corner of which is honesty, another responsibility and the third, discipline. It takes honesty, responsibility and discipline in order to have integrity.
However, the integrity if an individual is also a reflection of the ethics and mores of the individual. What is acceptable ethics for one person may not be acceptable for another. This is why it is important for the Non Executive Director (NED) to be a close fit with the board from his point of view as well as the boards. There are agreed upon rules of ethics and engagement in a board with which one is expected to adhere to as a NED.
In addition, ethics is not a case of black or white. There can be infinite shades of grey and these shades of grade are where integrity becomes most important for a NED.
"You are responsible for everything that happens to you"
There are many definitions for responsibility but a good one for our purposes is:
Having a capacity for moral decisions and therefore accountable; capable of rational thought or action and chargeable with being the author, cause, or occasion of something.
It derives from Latin responsum, noun use of neuter past participle of respondere to respond; replacing Middle English respounse < Middle French respons.
Responsibility could almost be regarded as an ability and like many abilities the more it is practiced the better one gets at it. By the same token the less one practices applying responsibility the less capable one becomes. Responsibility is an activity. Not passivity. Even if one was not initially responsible for an activity, the moment one joins a board one immediately shares responsibility for the decisions and actions of the board and one can assume responsibility for it and thereby assume a measure of control over that activity and effect a change. A new Chairman of the board for example.
Further. It does not matter the circumstances or economic climate. Assuming full responsibility means not accepting any excuses or reassigning responsibility outside of one's area of influence. It means, come what may, one is ultimately responsible for the board's decisions and activities as a whole as well as for one's individual decisions. Taking full responsibility places the director into a more causative role and extends his or her ability to take action.
Barriers and Freedoms
While it is important to have a regulatory field within which to operate, too much regulation can be just as bad as too little. A highly regulated field confines the board and tends to promote hesitancy in the decision making process. Should we act or not? Is there a regulation that will impact on our decision in a particular matter and what are the consequences of this? Where a board is more concerned with consequences rather than results, the board will lack direction and leadership and even proper and due governance as since they will not be making good decisions on behalf of the shareholder and the good of the company.
On the other hand, having little or no regulation means that the board can run wild and cause potential harm to the company through an unrestricted decision making process. So a balance needs to be struck that enables effective governance within the scope of the regulatory structure to which the board must adhere while observing the requirements of that regulatory position.
Responsibility is also proportional to the amount of regulation that exists. The more regulation imposed, the less responsibility required and in some cases that is not a good thing as ones area of responsibility and accountability is reduced across the board (no pun intended). No regulation would mean that total responsibility would be required by the board and board member.
The scope of a directors influence within and, indeed, outside of the board, means that with freedom to act comes honesty, discipline and responsibility.
Personal Conflicts of Interest
As well as the conflicts of interest that is generally understood may exist in a board position, they can also be personal conflicts of interest that may not always be apparent for the individual board member.
An obvious example of course is a board member who is a vegetarian serving on a meat marketing board but less obviously is a board member with one set of ethics values serving on a board that has a different set of ethical values. Such as with religious or philosophical views at variance with the boards values and philosophy.
Even less obvious is serving with other directors with different ethical or moral standards and with which one can be hard put to reconcile.
All of this is part and parcel of ensuring a good 'fit' with the board. From the directors point of view also, is the board a good fit for him or her?
The results of a board in which all members are conscious of the importance of their integrity and how this is reflected in board decisions can be quite marked.
Being a board member is a trusted responsibility and not to be taken lightly. It is also an extremely rewarding endeavour that gives great satisfaction as a leader in society.
A board that has the highest standards of integrity will make correspondingly optimum decisions for the benefit of the company, its shareholders and stakeholders and will serve the company well. Remember, the board member is not just a captain of industry but is also a servant by virtue of service to the board and the company. He or she is there to give their very best service to the company and most board members do just that.
We have only touched upon these areas and a more in depth paper is envisioned in the not too distant future.
Part one of this article can be found at Corporate Governance - Part 1
Part 2 can be found atCorporate Governance - Part 2
Part 4 Coming soon!
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