Tags: Corporate governance
This guidance is intended to provide practical recommendations for boards as they seek to promote an ethical business culture within their organisations.
It is also intended as a tool for practitioners and ethics advisers who support boards in delivering their duties.
Under the UK Corporate Governance Code, the board of a listed company is required to ‘establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture’. Ethical culture is also recognised as vital in the Wates Principles for Large Private Companies.
The importance of establishing an ethical culture is now widely recognised across organisations in the private, public and third sectors. This guidance exists to support boards of listed and other businesses, the public, private and third sectors. It is drafted to be flexible enough to have value for both large and small organisations, in considering how they should promote and monitor an ethical culture.
Background: The IBE convened an advisory group comprising a majority of corporate board members plus representatives of business ethics practitioners and a company secretary, and sought advice from regulators to share and oversee the development of this guidance for boards.
Advisory group members
Chair
- Simon Thompson, President of the IBE Advisory Council; Senior Adviser, Rothschild & Co.; and former chair of 3i Group, Rio Tinto and Tullow Oil
Members
- Dr Margaret Casely-Hayford CBE, Non-Executive Board Member, Co-op Group, and Chair, Shakespeare’s Globe
- Sir Douglas Flint, Chairman, abrdn
- Robert Smith, Director of Business Compliance and Ethics, Serco
- Graham Staples, Group Company Secretary, Schroders
- Jasmine Whitbread, NED, WPP plc and Compagnie Financière Richemont SA
Observer
- David Styles, Director of Corporate Governance and Stewardship, Financial Reporting Council
IBE support
- Dr Ian Peters MBE, Director
- Rachael Saunders, Deputy Director
Guidance
An ethical business culture that goes beyond compliance represents a source of competitive advantage, promoting high standards of business conduct and integrity. It builds trust, loyalty and advocacy among employees, customers, suppliers, regulators, governments and other stakeholders. The ethical challenges facing an organisation vary by geography, sector, company size and function. They also vary over time, as societal expectations change. The purpose of this guidance is to set out a summary of areas for consideration by Boards as they seek to promote an ethical business culture within their companies.
- Board members and senior management should lead by example, acting with integrity and treating all stakeholders with courtesy and respect. In seeking to promote an ethical business culture, authenticity is essential. The Board should be alert to any mismatch between words and actions, particularly when things go wrong.
- When recruiting Board members and senior managers, the Board and management should satisfy themselves that successful candidates understand the importance of being role models for the desired values and behaviours, and should act decisively (and, where possible, transparently) when leaders fail to uphold the standards of behaviour expected of them. Management may choose to adopt ethical behaviour as a specific criterion when evaluating performance and considering retention, promotions and remuneration.
- Most Boards, particularly of large or complex companies, publish a statement of purpose and values, developed by senior management following engagement with employees and other stakeholders. Purpose describes why the company does what it does. Values describe how; they are the shared beliefs and behaviours that enable the company to achieve its long-term strategic objectives. The Board should ensure that a company’s purpose and values are reflected in its strategy and use multiple channels to check that they are understood and embraced by employees, and consistent with the experience of all stakeholders.
- When reviewing a company’s business model or making strategic or operational decisions, Board members and management should seek to identify, mitigate and monitor ethical risks that have the potential to cause harm or offence to others, hinder the development of an inclusive culture, undermine trust, damage the reputation or otherwise impair the ability of the company to achieve its objectives. The Board should pay particular attention to business practices undergoing rapid change, such as the use of social media or artificial intelligence.
- The Board should identify and monitor both leading and lagging indicators of ethical risks. Lagging indicators might track actual or potential ethical breaches. Leading indicators might measure stakeholder satisfaction, including complaints and grievances; weak signals or proxies (such as staff turnover or absenteeism) that may indicate a heightened risk of misconduct; or the implementation of mitigation measures. Where possible, both internal and external benchmarking should be used to recognise best practice and identify areas requiring remediation.
- Most companies, and particularly those operating in multiple locations or sectors, adopt a formal code of conduct/ethics that defines how the purpose and values of the company are put into effect and the standards of behaviour expected of leaders and employees. Such codes should provide practical guidance to assist decision-making at all levels of the organisation and be regularly updated to take account of changing regulatory requirements and societal expectations. The Board and management should also review whether codes of conduct are required for non-controlled subsidiaries, contractors, suppliers, vendors and other business partners.
- Openness and effective communication are essential to identify, monitor and mitigate ethical risks. The Board should promote a diverse and inclusive culture that empowers all employees and other stakeholders, including customers, suppliers, local communities and civil society, to raise questions or concerns without fear of retaliation. The Board should ensure that appropriate, easily-accessible ‘speak-up’ channels exist for stakeholders to raise and, if necessary, escalate concerns or grievances, and that such reports are investigated, remedial action taken as required, and feedback provided to the complainant to enable continuous improvement.
- The Board should ensure that management have put in place appropriate induction programmes and regular training for Board members and employees to ensure familiarity with the company’s purpose, values and code of conduct. Employees performing roles with a high exposure to particular ethical risks might require bespoke training on the identification and management of such risks and the appropriate channel to report and, if necessary, escalate concerns about potential or apparent misconduct.
- The Board should satisfy itself that the company’s remuneration policies and practices, including performance related pay, are consistent with its purpose and values and do not inadvertently create incentives for unethical behaviour. Similar considerations may apply to the incentivisation of contractors, vendors and other business partners.
- All human organisations are fallible. When material ethical lapses occur, the Board should ensure that they are investigated, the root causes are identified, and measures put in place to prevent a recurrence. Failures should be treated as learning opportunities, to strengthen systems, processes and training.
- All misconduct should result in appropriate consequence management. Disciplinary action in response to egregious misconduct can send a powerful signal about the importance of an ethical business culture, but the Board should be alert to the potential impact of punitive measures on the future ability of the company to share information, understand root causes, and learn from mistakes. An ethical business culture is best sustained and strengthened by recognising, rewarding and promoting individuals who consistently display integrity, respect and moral decency in their behaviour and business judgement.
- The Board should ensure that management have the necessary resources to undertake the activities described above and that the individuals responsible for monitoring and overseeing business ethics are independent and objective. The senior responsible manager(s) should regularly report to the Board or a sub-committee of the Board and have unfettered access to the chair or a designated non-executive director.
For more support on taking action on business ethics, see IBE’s Business Ethics Framework.