Once Again It’s Leadership Integrity
July 16, 2008
Despite Sarbanes/Oxley, business schools ramping up Business Ethics courses and lofty Corporate Codes Of Ethics, the Mortgage Market crisis indicates that we still have problems with integrity and ethics. While the mortgage crisis focuses on financial services companies, it is yet another wake-up call.
Leadership integrity and ethics continue to be lacking. For example in The 2007 ETHICS RESOURCE CENTER’S NATIONAL BUSINESS ETHICS SURVEY® (registration needed but worth it) indicates –
- Ethical misconduct in general is very high and back at pre-Enron levels - during the past year, more than half of employees saw ethical misconduct of some kind.
- The number of companies that are successful in incorporating a strong enterprisewide ethical culture into their business has declined since 2005. Only nine percent of companies have strong ethical cultures.
- Many employees do not report what they observe - they are fearful about retaliation and skeptical that their reporting will make a difference. In fact, one in eight employees experiences some form of retaliation for reporting misconduct.
In the report the Center indicates “The Ethics Landscape Is Treacherous - Corporate America Is at Great Risk.” This is very sobering, however since 2002 and Sarbanes-Oxley, there have been similar cautionary tales apparently with little effect. Some may indicate a need for more regulation. But this is not the answer since rogues will always find ways to get around these. The solution must be a serious effort from senior leadership tobuild an organization wide ethical culture.
The Ethics Resource Center offers some useful suggestions.
Consider these additional suggestions as you build integrity within your leadership team. They are aimed at integrating Integrity within the organizational culture. You must address “the way we do things here in company x”, or the norms governing how people make decisions each day.
- Integrity starts with the Board of Directors who develops an ethical practices statement and demand adherence. Violators must be publicly admonished similar to what Jack Welch did at GE
- Ensure these practices flow easily throughout the culture and embedded in the formal and informal company practices
- Stop the scoundrels at the gate - when recruiting leadership positions, use new approaches to reviews and assessments designed to surface integrity issues. Bristol-Myers, Pfizer and smaller companies such as Spartan Stores are using innovative approaches to filter out candidates with Integrity issues. Yes it is possible to interview for integrity see “Can You Interview For Integrity?”
- Put Integrity components in compensation/incentives programs for all not just executives.
- Communication between leaders and people in the organization deteriorated despite polished multimedia techniques. Your message may be lost in the technology. Tell stories about authentic leaders at company meetings, publish them in company newsletters. Tell them about company performance. Avoid fancy slides, just tell them the facts.
- Leader development programs must include a first course/seminar in Integrity.
- Be seen by your people. Let them see and talk with you in a relaxed place. If you “hide” in your office, it’s difficult to build Integrity.
- Turn bureaucracy on its head.
- Tough decisions always challenge Integrity. Such times require courage to do the right things. Don’t waste time over analyzing. Embrace integrity and you’ll know what to do.
- No more “yes men/women”. Surround yourself with trusted people with diverse viewpoints who tell you what they really think about your ideas. Building Integrity takes time and continuous vigilance to maintain.
I will be interested to see what, if anything, will happen to improve corporate ethics after this latest scandal.
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Missing Links in Corporate Governance
July 14, 2008
My recent post on Corporate Governance ratings highlighted a recent study that questioned the relevance of rating agencies scores to corporate performance. Seems that the agencies are missing something.
Some observers feel that ethics may be the most important business leadership issue of this decade.
Alan Lane Ethics The Global Challenge Communication World I November-December 2005
When in December 2006 the Gallup organization asked Americans who they trusted to act honestly and ethically, only 18 percent rated the ethical standards of business executives as “high” or “very high.”
The Board’s Role In Ending Investor Skepticism By Harlan R. Teller JANUARY/FEBRUARY 2008 THE CORPORATE BOARD
Seems that the rating agencies overlook that good corporate governance consists of “hard” quantitative criteria (board structures, compensation, options) which they monitor and “soft” more qualitative criteria (code of ethics, corporate culture of the organisation, and the ethical behavior of employees and senior management) which are sparsely covered.
There is some hard performance evidence on the importance of soft criteria –
Corpedia has identified a basket of stocks whose ethical practices have resulted in a competitive advantage versus their peers. We call it the Ethics Index. Ethics Index companies have outperformed The S&P 500 by more than 370% over the past five years.
Hmmm looks like the soft stuff really matters.
While regulations touch on ethical matters, the problem is that it is a external mandate. Matters of ethics and integrity must be motivated and enforced internally. Ethics must start with the Board and be continuously cultivated, encouraged and enforced through all levels of management. A culture stimulating ethical behavior must be established internally.
As Tom Tierney, former managing partner of Bain Consultancy remarked, “Corporate culture is what determines how people behave when they are not being watched. ”
Narayana N. R. Murthy Chairman of the Board Infosys Technologies Limited
Corporate Governance rating agencies would well to consider looking at the following items that at least give some good indications of internal ethical practices–
- Integrity hotline available on public website
- Corporate Values include ethics/integrity
- Corporate Policy on Corporate Governance available
- Company has Chief Ethics Officer
- All documents relating to how ethics are integrated with Corporate Governance are viewable
This is a partial list, but it is an example of what must be done to find those missing links.
Website or Blog - Daddy or Chips?
July 11, 2008
A long time ago, McCain posed this question which still reverberates in the minds of us old enough to remember it - and young enough to have been worried by it.
Now there’s a new question … website or blog?
Like Daddy or Chips, the question is unanswerable, because you may be able to have both. In fact, you almost certainly should have both, if you can.
Occasionally I’m asked what the difference is between a website and a blog – and usually the starting point for the answer is straightforward:
Read more
How to identify the focus of your strategy
July 8, 2008
Wouldn’t it be nice if you could see at a glance how your strategy explanation is going to come across?
Wordle is a clever tool which displays words from a piece of text in different sizes depending on their frequency in an image. Just for fun, I’ve run the text that summarises the strategies of BP and Shell on their respective websites through this tool, and come up with the following images …
Although they are quite attractive images in their own right, this does let us see quite clearly the differences between the two.
The most important words in the Shell image are:
Shell, new, billion, resources, capacity, increase, year
The most important in the BP image are:
performance, people, operate, restoring, close, gap
Without even needing to read the text, we can see that there is a difference in focus between these two companies. For Shell, it is all about increases in capacity; for BP it is all about people and performance.
Note that although the biggest single word for Shell is ‘Shell’, and for BP, their name is one of the smallest words in the image, this is probably due to the way that they have phrased their text. I stripped out people’s names, but not the names of the companies. And I’m not claiming that this is a piece of detailed analytic work - but I do think that it reveals what the main messages of your text are, based on the words used.
If you ran your strategy statement through the same tool, what would the main focus look like? And is it what you intended?
Rating The Corporate Governance Raters
July 8, 2008
Corporate governance attracts much public attention since it purportedly involves the economic-financial health of corporations and society in general. However, corporate governance is poorly defined because it typically is composed of differing mix of policies, procedures, internal practices all surrounded by laws and regulations.
Simply put -
…the overall purpose of corporate governance, which is to align as nearly as possible the interests of individuals, corporations and society.
Theories of Corporate Governance Edited by Thomas Clarke
OK maybe that’s too simple. Here is a definition from Investopidia –
“Good corporate governance is a situation in which a company complies with all of its governance policies and applicable government regulations (such as the Sarbanes-Oxley Act of 2002) in order to look out for the interests of the company’s investors and other stakeholders.
The corporate need to be in compliance with corporate governance has shaped an industry of advisers, rating firms and other services with an estimated 2008 sales of $52 billion (corp-integrity.com). Perhaps the most influential of these companies are the rating agencies. These firms - which include the Corporate Library and RiskMetrics Group’s ISS Governance Services and S&P - analyze companies against their own criteria and rate whether a company is well governed or not.
These ratings may influence a company’s cost of capital, equity share price and shareowner relations. As such, the companies that compile these ratings have achieved a significant presence in world financial markets. But, there are some problems — extensive studies indicate these ratings bear little relation to actual corporate performance. A recent Fortune article summarized a Stanford University study widely different ratings for individual companies.
The Stanford researchers summarized their findings–
We examine these claims for the commercial corporate governance ratings produced
for 2005 by Audit Integrity, RiskMetrics (previously Institutional Shareholder Services),
GovernanceMetrics International, and The Corporate Library. Our results indicate that the level of predictive validity for these ratings are well below the threshold necessary to support the bold claims made for them by these commercial firms.(Emphasis added) Moreover, we find no relation between the governance ratings provided by RiskMetrics with either their voting recommendations or the actual votes by shareholders on proxy proposals.
Rating the Ratings: How Good Are Commercial Governance Ratings? Rock Center for Corporate Governance Stanford University
A summary of this report is available. The Stanford study is one of a number of other similar studies that question the value of these ratings agencies. Some common themes in these studies include –
- Over reliance on quantitative accounting/financial criteria
- “You can’t legislate compliance”
- More emphasis needed on observable qualitative criteria, such as corporate culture, drivers of employee behavior and corporate integrity practices.
This post only touches the surface of this important subject. Future posts will cover additional aspects of Corporate Governance ratings and related topics. In the meantime, here is a Canadian company that just might be a model of effective Corporate Governance practices –
Note the focus on Integrity, the public display of an “Integrity Hotline” and a clear display of compliance documents. Criteria the rating agencies miss.