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Integrity: Regenerating Boards for Quality Leadership PDF Print E-mail
Written by Colin Coulson-Thomas   
Sunday, 17 February 2013 15:42

(a note from the editor)  The ‘news’ seems to be a never-ending stream of scandals and disclosures.  If it is not horsemeat substituted for beef it is yet more examples of failures in banking regulation, insurance miss-selling, dodgy breast implants, retail rip-offs, tax evasion, the police trading stories with the media or a former Prime Minister excusing bribery and condoning corruption.

This flow of disclosures – wearisome though they are – may simply reflect our new-found digitally-enabled ability to uncover things almost as fast as they’ve been covered up. But less worthy of celebration is the sad reflection that desperate times have tempted many to cut the corners and compromise on ethical standards.

So we were delighted to find Professor Colin Coulson-Thomas reading the Riot Act to a directorial demographic.  He did so, of course, at a fair distance from home and whilst his words were reportedly well-received by his predominantly Indian audience it has not troubled the business media elsewhere.

We are therefore reproducing his speech in full.  It is long (2600 words) but the patient reader will gain a sense of the sincerity of his message and the extent to which he has made valuable contributions to boardroom education.

 

23rd World Congress: Leadership & Quality of Governance

Integrity: Regenerating Boards for Quality Leadership

Prof. Colin Coulson-Thomas

Keynote – 1, Friday 8th February 2013

Hotel The Lalit Ashok, Bangalore, India 

Prof. Colin Coulson-Thomas

 

“If a company had a heart or a soul it would be found in the boardroom”.

With that line I opened my book Creating Excellence in the Boardroom. I went on to question whether this view represents what could be, or perhaps should be, rather than what is.

Some boards misrepresent their finances. They take decisions that destroy value, harm the interests of stakeholders or pollute the environment. They condone or turn a blind eye to dubious practices and illegal activities.

Other boards deliver financial performance but they still seem to lack heart and soul. They are cold and hard in their treatment of staff and customers they no longer want. They are ruthless with individuals and communities who get in their way.

As a director you should consider why anyone should believe you or follow you. Is it because you are important and others are following their self-interests, or is it because people trust you? Do they believe in the direction and purpose you have established for your enterprise? If you loose your appointment will they care?

Sometimes there is a wide gap between appearance and substance, a deep gulf between rhetoric and reality. There is concealment rather than transparency, obfuscation rather than enlightenment.

Despite governance codes corporate scandals still occur. When Governments step in to bail out banks and prevent a meltdown of financial systems the conduct of boards is brought into focus. Some people question capitalism itself.

Short-term greed and paying large bonuses to people for bringing potential time bombs into their organisations is not an elevating spectacle. To restore faith in markets and re-establish the standing of boards where should we begin the process of regeneration?

Creating Excellence in the Boardroom and the first edition of my book Developing Directors on building effective boardroom teams were published twenty years ago. Both books drew upon my surveys of directors and board chairmen for organisations such as the UK’s Institute of Directors, the Training Agency, the Institute of Personnel Management and the NHS Training Directorate. Their findings underlined the importance of competent directors and effective boards.

In one survey for the IOD certain directorial attributes such as strategic awareness and objectivity were listed. Participating chairmen were then asked an open-ended question on ‘other qualities’ they sought in directors. Drive, determination, enthusiasm, loyalty, commitment and integrity were mentioned most often.

The list of ‘other qualities’ was dominated by personal qualities. Their ranking recognises that while challenge is desirable, sustained persistence is often required to pursue a difficult path. Additionally, certain courses of action in pursuit of an agreed vision can strain the unity of a board.

Integrity was considered necessary for establishing relationships of trust, within the boardroom and with stakeholders. A true heart and honest soul can engage and connect with people who want to work for, invest in, buy from or collaborate with companies they feel will be open with them and treat them fairly.

When stakeholders have a choice, a lack of integrity and trust can cause long-term harm. Employees may underperform or leave. Desirable customers take their business elsewhere. Suppliers may no longer put themselves out. Investors may sell their stock.

Despite its importance, integrity cannot be assumed. Misrepresentation, distortion, deception and dishonesty abound. People exaggerate their achievements on CVs. They claim credit for other people’s efforts. They talk up stock they would like to sell. Interest rates are fixed and offerings are miss-sold. Labels mislead. Athletes take drugs to enhance their performance. Fraudsters embezzle funds.

Objective, independent and honest advice is sometimes elusive. Can we always assume that professionals are acting in our best interests? Or are they focused on maximising the incomes of their practices? Are mangers who advocate a management buy-out seeking to benefit the company or make a killing for themselves?

Twenty years ago I gave a talk on governance to members of the Order of St Lazarus. For a period we were the largest provider of food and medical aid to Eastern Europe and countries formerly in the Soviet Union. Our volunteers personally delivered aid to beneficiaries, travelling in war zone conditions in the Balkans. People will go to great lengths to serve a cause they believe in.

Other organisations found significant amounts of aid ended up in the bank accounts of local rulers and their supporters rather than benefitting people in need. In some countries corruption was endemic. In certain areas this is still the case.

Following my talk I was asked to lead an international initiative of the Order to improve governance. I gave up my role as chairman of the executive committee in England and Wales to travel to areas with inadequate governance and develop cheaper and quicker ways of changing behaviour and improving performance.

Since 1992 there have been a succession of governance reports and codes of practice. The initial focus was upon quoted companies, and the needs of other organisations have not been so systematically discussed.  Awareness of the need for improved governance has increased, but there remains much to be done.

We need to be realists. Some people are invariably honest or dishonest.  Others will do something they know to be wrong if it will benefit them and the risk of discovery and penalties are low in relation to what they might gain.

For organisations and societies the cost of monitoring, compliance and policing can be high. Instituting, managing and reviewing various controls and methods of prevention and detection can be time consuming. ‘Traditional’ controls considered essential can also constrain freedom, inhibit creativity and slow progress.

The costs and benefits of a lack of integrity are sometimes unequally shared. For some the payoffs from underhand behaviour can appear attractive, while its negative consequences can have a smaller impact upon a much larger number of people.

When illegality and corruption occurs a great many people can pay the price. False insurance claims by the few can mean higher premium payments for the many.

The award of a contract to a friend, an ‘insider’ or the payer of a bribe can seem hugely beneficial to a favoured enterprise. When competitors are also willing to pay for business in particular markets a director might feel under pressure. Opting not to ‘play the game’ may seem disloyal to those for whom one is responsible.

Double standards and the variability of practice in different places can be frustrating. I recall many years ago travelling to an overseas market to investigate how best to sell helicopters to commercial organisations.

In the market concerned there were a growing number of entrepreneurs with the means to buy a helicopter. Most potential purchasers relied upon the advice of their pilots when deciding which helicopter to buy. International competitors routinely bribed pilots to recommend their machines.

A practice that would be condemned in one society can become widespread and avoid retribution in another. Should my client have adopted a relative view of morality and recognised that convention can vary in different markets?

Does an absolutist view and claiming the superiority of one’s morals over those of others smack of arrogance? The supplier did adopt an absolutist view and simply forbad the paying of a bribe in any circumstances. Consequently, it failed to sell helicopters to commercial customers in the country concerned.

In the UK today people and organisations are subject to a range of codes, regulations, directives and laws. The Bribery Act 2010 is designed to prevent the payment of bribes. Quite apart from important considerations such as harm to the reputation of a company, individuals face the risk of severe penalties.

Internationally, practice still varies across different jurisdictions. Sometimes one encounters a widespread willingness to ignore or flout applicable regulations and laws. Competitors from certain countries unashamedly steal intellectual property. Temptations remain. To address them we need to understand them.

Because of globalisation, the potential gains from abuse of ‘gaps’ between different regulatory and legal jurisdictions have massively increased. The legal exploitation of ‘differences’ can create moral and business dilemmas. Should one risk a consumer boycott and avoid paying taxes by adopting a corporate structure and system of transfer pricing that moves ‘profit’ offshore to a ‘low tax’ jurisdiction?

Notwithstanding relevant laws, regulations and codes, a lack of integrity has consequences and implications for both directors and citizens. Potential gain in relation to the probability of being caught may appear to favour certain illegal and corrupt practices. However, the full cost of a lack of integrity is the result of a great many acts ranging from bias and favouritism to the gross abuse of power. 

Widespread corruption and barriers to entry that favour certain suppliers and those who ‘know the right people’ and how to gain favours can reduce a country’s competitiveness and long-term growth. Companies that refused to pay a bribe and so failed to win a contract might have provided a more cost-effective option.

Excluding new entrants and those who refuse to engage in corrupt practices can reduce productivity and inhibit the introduction of better and more sustainable practices. Those rejected or kept out might include innovators who could have transformed an operation or service to the benefit of many people.

Milton Friedman in his 1962 classic Capitalism and Freedom warned of the abuse of power and put the case for free markets. In the absence of restrictive practices and when markets are free buyers can vote with their money and purchase goods and services that best meet their needs.

Many directors have opportunities to influence decisions and favour some parties over others irrespective of merit. When considering options, from interviewing to buying, it might be possible to favour a friend or relation, or someone who has offered a bribe, or people of a certain background, religion or nationality.

The selection of a less qualified person or a less appropriate offering can have negative consequences for oneself, one’s organisation and wider society:

  • For an individual the breaking of a law could result in dismissal, a fine or imprisonment.
  • Organisational consequences could range from penalties to serious harm to a corporate reputation.
  • For a country the cost of favouritism could include reduced innovation, productivity and competitiveness.

The full consequences for wider society become apparent when we look at the lack of integrity in markets. In an impact assessment for market abuse regulations the European Commission has estimated the annual cost of a lack of integrity in European equity markets is 13.3 billion Euros. Imagine what the global cost might be if one included bond, derivative, currency, commodity, energy trading and other markets.

Some people benefit from a lack of integrity in markets, for example those who collude with others to sell stock in order to buy it back more cheaply. The cost is again born by many innocent people who suffer reduced returns and lower pensions.

Regenerating corporate boards for quality leadership requires more than rhetoric and pious statements. Action is needed at individual, corporate and system level.

As practicing directors we can protect corporate reputations by supporting those who act with integrity. We can identify and mitigate risks. We can deploy counter fraud strategies. We can adopt cost-effective ways of preventing abuse and ensuring compliance that do not restrain freedom, creativity and innovation.

In India the Companies Bill will establish a requirement for an additional 40,000 directors. When selecting and developing potential directors you can look for people of sound judgement who when faced with choices instinctively ‘make the right call’.

At corporate level new leadership and new governance is required, with a switch of emphasis from planning to implementation, and from board and corporate structures to changing the behaviour of people. The latter can be done with performance support, and without expensive efforts to restructure or change a corporate culture.

Less emphasis on top-down motivation and management is required. More attention should be devoted to engaging people - including customers - and helping them to adapt, comply and excel. In place of exhortation, people in front-line jobs should be provided with the performance support to do what is required to benefit themselves, their customers, their companies and the planet.

A company whose board I chair is a pioneer of performance support. As well as boosting productivity, reducing cost, speeding up responses and ensuring compliance, performance support can enable people to act in desired ways and prevent actions that would contravene a law, regulation, policy or code.

Miss-selling, the resulting lack of trust, and penalties imposed by regulators can be avoided. People quickly adopt 24/7 performance support because it increases understanding, reduces stress and makes it easier for them to do difficult jobs.

The right support can also enable consumers to make more responsible consumption and lifestyle choices. People who are more aware of the consequences of purchasing decisions can avoid options that might damage their health or harm the environment.

Ignorance, favouritism and corruption can lead to inefficient use of scarce resources. It is in all our interests that competitive tenders are won by the most qualified suppliers. We should all champion openness, transparency and fair competition.

Hypocrites say one thing and do another. Many organisations have ethical codes. Yet how many CEOs who sail close to the wind and want to minimise tax payments would recruit a financial director with a history of whistle blowing?

Responsible and caring directors do more than just make speeches about the importance of integrity and sustainability. They recognise the opportunity they have to make a difference. They initiate practical steps that benefit their companies, stakeholders and the environment.

We can collaborate in advocating and supporting measures to improve the integrity of markets and trading systems. Again, there are practical steps that can be taken. Relevant support can increase understanding and enable corrective action.

Another company whose board I chair has developed algorithms for identifying sudden falls in market integrity. Trades can thus be redirected to exchanges where there is greater integrity. This could greatly reduce the cost to innocent buyers and sellers of a lack of market integrity.

Directors have onerous duties and responsibilities. Challenges and dilemmas abound.

I commend the Institute of Directors of India for championing the importance of integrity in the boardroom. I applaud the steps its leadership is taking to build the competence of directors and the effectiveness of boards.

The institute stresses the importance of a moral compass in the boardroom. Many directors have an opportunity to either do great good or cause significant harm. Nomination committees should be looking for candidates with strategic awareness, objectivity, a focus on customers and other stakeholders, communications skills, and other directorial competences.

In a complex and uncertain business environment such attributes may be necessary but not sufficient for an appointment to a board. Ensuring that people with the right personal qualities serve on corporate boards has never been more important.

Other candidates might be cleverer and more socially skilled. But when faced with difficult decisions and moral dilemmas will they assume responsibility, think for themselves, question and make fair, balanced and defensible decisions?

It is in our long-term interest that we bring into corporate boardrooms people who act with integrity and instinctively do the ‘right thing’ - the ‘right thing’ by their individual consciences in particular circumstances, the ‘right thing’ for the reputations and prospects of their companies, and the ‘right thing’ for all our futures.

 

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Author

Prof. Colin Coulson-Thomas has advised over 100 boards on improving director, board and corporate performance. He is a chairman of boards, member of the business school team at the University of Greenwich and adjunct visiting professor at Manipal University. His publications can be obtained from www.policypublications.com and he can be contacted via www.coulson-thomas.com.

 

 

Last Updated on Sunday, 17 February 2013 16:11
 

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