Tags: Corporate governance, Monitoring & Accountability
Read the blog by Prof. Chris Cowton, IBE’s Associate Director (Research).
How and where can ethics be addressed in an organisation’s corporate governance? The obvious – and correct – answer is the board of directors. To support its work, a board will have a number of committees that allow time for deeper review and debate. Some organisations have an ethics committee, but many don’t. However, this doesn’t mean that board committees, appropriately tasked, cannot help the board to discharge its responsibilities for the governance of ethics.
Since the Turnbull Report was published over 20 years ago, listed companies and other organisations have become accustomed to the idea that their boards have responsibility for the oversight of risk and internal controls. Significant banks and insurance firm are now required to have a separate board risk committee, but they are not the only ones to have taken this route to governing risk.
The Chartered Governance Institute (CGI) has recently published a guidance note on the terms of reference for risk committees in the context of the UK Governance Code. Its content makes interesting reading for any organisation with a risk committee. But how can it help with ethics?
Much of the good practice advice in the CGI guidance note is, not surprisingly, procedural, covering things like membership, quoracy, frequency of meetings and reporting to the board. However, when it comes to Section 8 on ‘Duties’, things become rather more interesting from an ethics perspective.
Under the ‘Risk appetite, tolerance and strategy’ sub-section, where the risk committee is expected to advise the board on the principal and emerging risk to the achievement of the company’s long-term strategic objectives, reference is made to several candidates for attention that get the ethics bells ringing:
- conduct risk
- reputational risk
- ESG issues
- ethical codes
- health and safety
Duties under the Companies Act 2006 are also cited. This should include S.172 duties, to have regard to stakeholders (such as employees, suppliers, customers, community and the environment) and the desirability of maintaining a reputation for high standards of business conduct. The guidance note’s list isn’t intended to be exhaustive, but there is plenty here to get a risk committee thinking about the intersection of risk and ethics.
Also, among the generic statements about ‘Internal controls and risk management systems’, the risk committee is advised to oversee and seek suitable assurance regarding, amongst other things, ’the appropriateness of the company’s values and culture and reward systems for managing risk and internal controls, and the extent to which the culture and values are embedded at all levels of the company’. As a staunch proponent of the idea of doing business according to ethical values, the IBE would see great scope for the risk committee to assess whether the organisation’s culture accentuates or suppresses ethical risks.
There’s an old joke (some trace it back to 1924) about a tourist, having asked for directions, being told ‘I wouldn’t start from here’. Perhaps your thought is that ethics is better overseen by an ethics committee. I wouldn’t disagree. However, recent IBE research suggests that, even among large companies, about half don’t have an ethics committee. For those that have a risk committee instead, the CGI guidance note shows that it might actually be a good place to start from.
Interestingly, the CGI guidance note mentions that it is important to ensure that duties are not allocated to more than one committee. It has in mind the audit committee, but does this mean that the risk committee should leave ethics alone if there is a separate ethics committee? I don’t think so, because the risk committee should take a holistic view of risk, which – increasingly – includes ethical risk. Furthermore, it might provide a valuable perspective to complement that of the ethics committee. The key thing is the clear allocation of responsibilities in the detailed terms of reference for both committees, supported by the same secretariat and a degree of cross-membership.
The important thing is that someone has their eye on ethics and ethical risk. Ultimately, that should be the board, but if there is a risk committee to help it discharge its responsibilities, so much the better.
Author
Professor Chris Cowton
Associate
Chris served the IBE as part-time Associate Director from 2019 to 2023, having previously been a Trustee. He continues to contribute to our work from time to time as an Associate.
Chris originally joined the IBE staff following a long career of leadership, research and teaching in the higher education sector. He is Emeritus Professor at the University of Huddersfield, where he served as Professor of Accounting (1996-2016), Professor of Financial Ethics (2016-2019) and Dean of the Business School (2008-2016). He moved to Huddersfield after ten years lecturing at the University of Oxford. He has also been a Visiting Professor at Leeds University’s Inter-Disciplinary Ethics Applied Centre, the University of Bergamo (Italy) and the University of the Basque Country, Bilbao (Spain).
He is internationally recognised for his contributions to business ethics, especially his pioneering work on financial ethics. In 2013 he was awarded the University of Huddersfield’s first DLitt (Doctor of Letters, a higher doctorate) in recognition of his contribution to the advancement of knowledge in business and financial ethics.
He is the author of more than 70 journal papers, has edited three books and has written many book chapters and other publications. He served 10-year terms as Editor of the journal Business Ethics: A European Review (2004-2013) and as a member of the Ethics Standards Committee of the Institute of Chartered Accountants in England and Wales (2009-2018). He continues to write extensively and to speak to both academic and practitioner audiences.