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Corporate Ethics and the Corporate Website

integrity-compass

In my post on Ethics, I mentioned that I would provide more posts on Corporate Ethics.

One company that understands the importance of Corporate Ethics is an energy-based holding company — Pacific Gas and Electric.

First they follow one of our guidelines for reporting ethics on corporate websites: ethics is prominently displayed in their About Us section (see image, below)

In PC&E’s online Code Of Conduct, the company displays their Core Values, and the first is —

We act with integrity and communicate honestly and openly:

  • Act ethically and with integrity
  • Deal with people and issues openly, directly and respectfully
  • Take actions that are consistent with words
  • Do the right thing even if unpopular or risky

Placing Ethics at the top of Core Values is a subtle but telling indicator that PG&E is serious about Ethics. There is also a note from the CEO to employees that reinforces ethical behavior.

Yet another item that distinguishes  PG&E from other companies is this checklist offered to employees —

Compliance and Ethics Decision-Making Checklist

When faced with a business decision for which there’s no set policy or clear course of action, use the Core Values … and your own good judgment to determine the best approach. In addition, ask yourself the following questions:

  • Will I feel comfortable with my decision?
  • Could I explain it to my parents or children?
  • How would it look in a newspaper?
  • Have I made a decision that is fair and just?
  • Have I verified the significant facts?
  • If I’m not sure, have I asked?
  • Have I determined if it’s legal and within policy?

Brilliant: this straight forward, easily understood checklist captures the essence of ethical decision-making.

PGE Ethics

In addition to Core Values and the Checklist, the company offers a comprehensive menu of references to guide ethical practices —

Finally, the company recognizes that the Board of Directors face more complex decisions so it offers a Code of Business Conduct and Ethics for Directors.

Kudos to PG&G for going well beyond a Code of Ethics and guiding its decision making via a well thought out Ethics Compliance Program – and for demonstrating this via the website.

Goldman Sachs–Here We Go Again?

The announcement came during stock market trading hours–GOLDMAN SACHS SUED BY SEC.

Some complained that the SEC should have waited until the markets closed. But the damage to Goldman Sachs shareowners and the markets was already done.

A week later more news came out on the weekend–

NEW YORK (MarketWatch) — Emails at Goldman Sachs Group Inc. released by a Senate subcommittee show just how much financial reform is needed, two leading senators said on Sunday.

The emails, released Saturday, show executives and other employees at Goldman Sachs knew that the firm was making money on the collapse of the housing market, largely by betting on the failure of mortgage securitizations and derivatives like the ones it bundled and sold to investors, whose failure led to the financial crisis.

“There is something terribly wrong about a country like ours where you make billions of dollars by making nothing and producing nothing but taking advantage of an economic situation, Sen. Christopher Dodd, D-Conn., said Sunday on Meet the Press.

What makes this emerging story even more interesting is that Goldman Sachs appeared on Barron’s February 15th cover story on The World’s Most Respected Companies; it was rated 30 out of 100 companies. Barron’s noted —

Barron's Most Respected

I am not faulting Barron’s (this is a good publication and I am a subscriber). Rather, this highlights the continuing problem we have with Corporate Ethics.

This story has another interesting and promising aspect: when considering a similar deal, Bear Stearns turned it down because of its Ethics conflict. As reported in the Guardian—

Bear Stearns, the Wall Street bank now part of JP Morgan Chase, turned down a similarly structured deal to the one under scrutiny between Paulson & Co and Goldman Sachs because it “didn’t pass the ethics standards”.

The bank, which collapsed during the credit crisis, “smelled trouble” when John Paulson, the hedge fund’s founder, approached it with the idea of creating an investment that the fund could bet against, according to author Gregory Zuckerman in his book on Paulson, The Greatest Trade Ever.

As noted in the MarketWatch item above, the Goldman Sachs incident is once again motivating a hair trigger demand for more regulation. When will there be a realization that you cannot regulate ethics?

This is not an academic or esoteric issue. When people are no longer restrained by objective notions of right and wrong, nothing is safe—not your investments, not your house, not your neighborhood, not you! What we’re talking about, ultimately, is the moral consensus upon which the rule of law rests—that’s the very foundation block of Western governments and societies.

When ethics fail in the commercial markets, more and more stringent regulations are certain to follow. It’s the only way to assure the integrity of financial and commercial transactions. But we lose freedom in the process.

The problem is that regulation, however well intended, can’t solve the ethical problem. The best regulation can do is to define what people can get away with by drawing a line they can’t cross. It does not answer the question, “What is the honest way to do business?” Crosswalk.com Commentary

In one of my recent posts, I mentioned that Ethics, to be effective, must be well integrated within the organization’s Culture; so much so that it guides daily decisions of all employees-

Perhaps the key reason is that most companies don’t realize that ethics must start with “the tone at the top”. Board and C-Suite members must be visible in promoting ethical behavior and putting in place an ethics program that promotes an ethics culture. This takes considerable effort and time since it must be embedded in the existing corporate culture.

Bravo to Bear Stearns for showing that Corporate Ethics can work, sometimes.

Boards Are Focusing On Risk Management

Top on the list of many surveys of issues that concern Boards of Directors is Risk Management. According to The Institute of Risk Management Standard publication —

Risk can be defined as the combination of the probability of an event and its consequences. In all types of undertaking, there is the potential for events and consequences that constitute opportunities for benefit (upside) or threats to success (downside). …

Risk management is a central part of any organisation’s strategic management. It is the process whereby organizations methodically address the risks attaching to their activities with the goal of achieving sustained benefit within each activity and across the portfolio of all activities.

The current economic/financial crisis is supplying ample risks to corporate boards. For example, in AON’s 2009 Global Risk Management Survey

Respondents told us clearly that the crisis impacting the global economy was the number one most important risk to their organizations. Other key risks cited include staying ahead of regulatory compliance; managing business interruption; meeting the challenges of increased competition; commodity price risk; protecting reputation; managing risks associated with cash flow, supply chains, and third party liability; and hiring and retaining top talent. Every one of these risks has increased in scale and complexity given the state of the current economic environment.

If companies are overwhelmed by these risks, imagine how they impact companies’ stakeholders. Effective communications of how companies identify and deal with these risks is now an overarching issue. Therefore let us take a look at what is out there.

First one of the most comprehensive displays of risks is by Tokyo Electric Power Company —

Click on one of the Challenges and you obtain a thorough explanation of it and what the company is doing to manage it. This technique works so well that the company should use it to display other risks.

For a comprehensive description of a risk management process look no further than UK based Friends Provident an insurance and pension company. Their Internal controls and risk management process displays an extensive explanation of their risk management process and the roles of senior management.

Another UK based company ROK plc uses a very effective visual to describe how it identifies risks —

This is a great example of the power visualization has in business functions. Notice how lots of information is clearly communicated. Suggestions for ROK plc, display this on your website, not only in the PDF of the Annual Report, and explain company efforts to deal with the risks.

One of the best communication of risks and how the company addresses them is on the website of The Bank of China.

This is an example of Credit Risk. Note how they describe, monitor and manage the risk. Visit their site to see how other risks are addressed.

Many companies are slow to embrace the need to clearly communicate risk management issues via their websites. The prevalent practice is to provide PDF links to their annual report. In a number of cases companies have good risk management practices but they bury them in the Annual Report. Better to take the content and enhance it to —

  • Clearly describe risks by category
  • Explain how the company is managing the risks
  • Explain the impact on the company and quantify as much as possible
  • Use visuals (see my post Business Visualization)

The companies mentioned here are good examples to use as benchmarks.

Tone At The Top Drives Innovation Governance

tone-from-the-topIn a previous post about tone at the top I discussed this subject… The post appeared when the economic crisis of 2008/2009 was about to start. Now tone at the top and innovation governance are more important than ever.

Simply put, ‘tone at the top’ is the sum of the Board’s and the C-Level manager’s values, actions and communications. How these responsibilities are executed will influence the success of the enterprise through the near future and will set the base for the longer term. These responsibilities include:

  • Strategy
  • Culture
  • Governance
  • Financial
  • Innovation

While most Boards and C-level managers know in at least some manner the importance of the first four responsibilities, too many are unaware of their responsibilities for innovation governance. As an HBR Network Blog indicates,

It’s time for leadership to step up. Match innovation rhetoric with personal involvement and investment. Move beyond narrow solutions to more systemic approaches. Raise aspirations from being the most innovative company among a tightly defined peer group to approaching innovation like Amazon, Pixar, 3M, or IBM. Actions that feel like luxuries today will be imperatives tomorrow, so get started.

Some companies heed this advice. For example here is a short sampling of what “the top” says about innovation governance:

Amy Radin, Chief Innovation officer at E*Trade Financial

Within this ever-changing landscape, strong leadership and a well-defined culture will determine a business’ success as a continuous innovator. But innovation has to be more than simply a groundbreaking idea – it has to be about viable new business concepts that meet real consumer needs better than what’s already in the marketplace.

Darlene Solomon, Agilent Senior VP and Chief Technology Officer

There’s a very strong innovation culture throughout the company, and a culture of teamwork. Agilent really encourages that. Innovation is not just R&D in Agilent. We’ve really tried to make clear that it’s about everybody questioning the status quo and looking to do something better than what’s been done before.

Fabrice Brégier, CEO Airbus

Innovation is at the heart of Airbus, it is part of our DNA and a fundamental ingredient in ensuring our long term growth and profitability. “This new network will instil and spread a more open innovation mindset across Airbus also taking on board the numerous ideas generated outside. I am convinced that this will enable us to respond to and anticipate future trends quicker for the overall benefit of our customers

While these exhibit a positive tone at the top, too many Boards and C-levels are risk averse and many lack a good or even a basic understanding of the technologies that drive innovation. More about this in a future post…

Innovation and Corporate Governance: Risks and Opportunities


At first glance corporate governance and innovation seem to have no relationship.

Corporate governance is, or perhaps should be, a rigidly defined set of principles and practices that are well codified. Innovation, on the other hand is not well defined, being somewhat free wheeling and creative.

Organizations are facing unprecedented rapid change and an ever increasing demand for faster decision-making. They must adapt to changes both inside—such as multi-generational employees and changing organizational arrangements—and outside the company such as regulations, competitors, and technology. 

While this is happening, the current menu of business tools and techniques is becoming less effective. The tools that worked in a Newtonian, mechanistic business world are too rigid and less effective. We are now in a Quantum world where chaos and complexity are the norms. 

The evolving business landscape demands that companies deal with “wicked problems”.  Wicked problems are messy, they are complex, don’t have direct solutions, cause experience and tools to be irrelevant, are based on conflicting, contradictory information and are connected with other problems. A wicked problem is so puzzling and confusing that it seems insoluble. This is where innovation comes in.

Perhaps this BusinessWeek article quote says it best:

“What was once central to corporations — price, quality, and much of the left-brain, digitized analytical work associated with knowledge — is fast being shipped off to lower-paid, highly trained Chinese and Indians, as well as Hungarians, Czechs, and Russians. Increasingly, the new core competence is creativity — the right-brain stuff that smart companies are now harnessing to generate top-line growth. The game is changing. It isn’t just about math and science anymore. It’s about creativity, imagination, and, above all, innovation.”

Companies  need innovation to launch new products, services and to reduce costs. Innovation is also risky since the outcomes are somewhat uncertain and could take more time and costs than anticipated. This is the nexus with Corporate governance. The Board needs to balance the need for innovation with the associated risks.

A simple definition of innovation governance is provided by Professor Jean-Philippe Deschamps  (Switzerland based IMD business school) :

Current innovation management techniques and organizational solutions tend to focus on many – not all – of the hard aspects of innovation, but much less on its softer elements. The scope of innovation is so broad that few companies appear to have thought deeply about what it takes now and will take in the future to steer and manage innovation in an integrated way, across all its aspects, hard and soft.

Innovation governance should be a key issue for Boards. As Steve Lennon puts it:

So directors need to establish a framework of corporate governance that can deliver two things that normally go together like oil and water: more innovation and less risk.

As tough as it may seem, this dilemma is at the heart of every director’s duty.

Yet, according to a report from Capgemini Consulting:

  • only 42 percent of respondents have an explicit innovation strategy;
  • only 43 percent of respondents say they have a formally accountable innovation executive.
This indicates that many companies need to look more carefully at how they govern innovation. Future posts will profile companies with best practices and other issues related to innovation governance.

 

Corporate Governance, Ostriches and Black Swans

Simply put, a Black Swan event is one that has a low chance of happening but if it does the impact could be catastrophic. The most current example is the BP oil spill in the USA.

Underpinning Black Swans are some interesting philosophical and psychological factors of human frailties.

A black swan is a highly improbable event with three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was. The astonishing success of Google was a black swan; so was 9/11. For Nassim Nicholas Taleb (author The Black Swan: The Impact of the Highly Improbable), black swans underlie almost everything about our world, from the rise of religions to events in our own personal lives.

Why do we not acknowledge the phenomenon of black swans until after they occur? Part of the answer, according to Taleb, is that humans are hardwired to learn specifics when they should be focused on generalities. We concentrate on things we already know and time and time again fail to take into consideration what we don’t know. We are, therefore, unable to truly estimate opportunities, too vulnerable to the impulse to simplify, narrate, and categorize, and not open enough to rewarding those who can imagine the “impossible.”

Black Swan: Strategy Execution for the “Outlier”

When Black Swan events occur, shareholders can suffer significant losses. Forbes magazine in their article, Of Brown Pelicans And Black Swans chronicled the financial impact of various corporate Black Swans–

Company

Start Date

End date

Market cap
(start date, in millions)

Market cap
(end date, in millions)

Money Lost

XOM

Exxon Mobil

3/24/89

4/10/89

55,275

52,170

3,105

MS

Morgan Stanley

9/10/01

9/17/01

45,171

39,259

5,912

BAC

Bank of America

9/10/01

9/17/01

92,439

87,147

5,291

MAR

Marriott International, Inc

9/10/01

9/17/01

9,996

7,892

2,104

BID

Sotheby’s

9/10/01

9/17/01

636

550

85

AXP

American Express Company

9/10/01

9/17/01

40,563

35,048

5,515

BK

The Bank of New York Mellon Corporation

9/10/01

9/21/01

27,269

22,555

4,714

XOM

Exxon Mobil

8/29/05

10/21/05

368,346

349,115

19,231

COP

Conoco Phillips

8/29/05

10/21/05

87,791

80,943

6,848

SCGLY

Societe Generale SA (ADR)

1/18/08

1/28/08

58,192

49,014

9,178

TM

Toyota

1/21/10

2/4/10

155,884

123,749

32,135

DLAKY

Deutsche Lufthansa AG

4/15/10

4/28/10

8,207

7,395

812

BAIRY

British Airways

4/15/10

4/28/10

4,338

3,952

386

BP

BP

4/22/10

6/17/10

186,431

99,273

87,158

The costs of Black Swans can be daunting.

ostrich heads

For Corporate Governance, dealing with Black Swans is risk management. The Board is responsible for oversight and the strategic direction of the company— not execution. This means Board members should take on a devil’s advocate role by asking C-Level managers questions such as–

  • How will you make the strategic direction come alive?
  • Have you considered all financial, strategic, ethical and risk issues?
  • What is the worst that could go wrong and how will you manage the outcomes?

More insights for dealing with Black Swans are covered in the report Black Swans Do Exist published by International Federation of Accountants–

  • Directors should increase their focus on risk, and engage more in detailed appreciation and understanding of the risks in their company’s products and service areas. For the financial services industry, a solution could be for boards to establish a specialized risk committee, and consider the employment of an external risk specialist.
  • Black swans do, and will always, exist. Therefore, be much more alert to the fact that, even at the extreme end of risk possibility, things do actually happen.
  • Executive remuneration should be better aligned with the longer-term real performance (in terms of profitability, not sales volume) of the organization—for example, via deferred remuneration in the form of shares.
  • Governance issues are probably best tackled with a mixture of regulatory, investor, and board responsibility. To only look to investors being more active is unlikely to be effective.

What do you think? Would this help companies deal with the arrival of a Black Swan event – and avoid the ostrich ‘head in the sand’ syndrome?

Coming soon: How Shell Uses Scenarios To Manage Risks.