Report: CEOs Must Do Well and Do Good, Or Answer to the Board

Report: CEOs Must Do Well and Do Good, Or Answer to the Board

New governance standards have caused a growing number of boards of directors worldwide to become more involved in companies’ ethics programs, according to a new report by The Conference Board. The report includes a far-reaching review of best governance practices on ethics.

Ninety-seven percent of the companies surveyed have ethics programs, but depending on where the company is located, the board of directors’ role in the program differs greatly. Outside of the U.S. and Western Europe, nearly all company ethics programs were established by the board of directors, while the figure for U.S. programs launched by board resolution is lower (66%).

The report, sponsored by Microsoft, is based on a global survey of 165 company boards. In almost all of the companies surveyed, boards now play a key institutional role in ethics program oversight.

Ethics or compliance programs utilize internal policies and procedures to prevent and detect violations of law, regulations and rules, and to promote ethical behavior by and within the company. Common elements of such programs include: codes of conduct; communication of standards through training; methods to encourage employees to report possible violations to management, enforcement mechanisms through investigation and discipline; and oversight and review to achieve ongoing improvement.

“While corporate scandals and the Sarbanes-Oxley legislation may have been strong factors for U.S. boards to exercise greater ethics program oversight, directors in other parts of the world were often motivated by other factors,” says Ronald E. Berenbeim, principal researcher at The Conference Board and co-author of the report with Jeffrey M. Kaplan of Stier Anderson, LLC. “But in all countries and regions, the public and shareholders expect the board of directors to play an important role in monitoring a company’s ethics practices, policies, and performance and, increasingly, directors are recognizing that responsibility.”

Board oversight entails the review of a program’s structure/scope and its operation. The three categories of Board structure and scope deliberations are the determination of risk areas, parts of company operations covered by the program, and code revisions.

Improving Reputations

In the U.S., general legal developments were most often cited as a relevant factor for greater board scrutiny of ethics programs. But in the UK, India, and Western Europe, survey participants often cited “enhancement of reputation” as a reason behind directors’ involvement in ethics issues. In Japan, “laws, regulation and/or rules relevant to business” were cited most often.

Compared with other regions and countries, reputational risk was of relatively little importance to U.S. boards. Only 20% of U.S. survey participants said that it was a most relevant factor. But reputational risk appears to be a much more important motivating factor for boards elsewhere. A total of 75% of respondents in India, 62% in the UK, and 46% in Western Europe cited it as a most relevant factor.

A Newly Defined Ethics Role for the Board

In all countries and regions except Japan, most boards have a defined role in overseeing ethics programs.
  • 69% of UK boards and 74% of Western European boards delegate the ethics program oversight responsibility to a committee.

  • The choice of committees varies considerably within regions. In the U.S., more than three-quarters of the participating companies delegate program oversight to the audit committee. No company reported that this task was assigned to an ethics committee.

  • 63% of Japanese boards vest such authority in an ethics committee. In the rest of the world, though it is less often delegated the task, the audit committee is still the most likely body to oversee the program. The second choice for both U.S. and non-U.S. boards is the governance committee.
In nearly half of the U.S. companies surveyed, the General Counsel is the executive with principal responsibility for reporting to the Board on ethics or compliance issues. In the U.K., India, and Western Europe, CEOs are more likely to take the lead in discussing ethics and compliance matters with the Board. In the Indian and Western European companies, the task may also be assigned to the internal auditor. In the U.K. and Western Europe, ethics or compliance officers rarely have principal responsibility for reporting to the board on the company’s program. In contrast, this role is nearly always assigned to Japanese ethics officers (88%) and frequently exercised by their counterparts in the U.S. (26%) and India (30%).

Ensuring the Board’s Ethical Conduct

Nearly 90% of the survey participants ask board members to adhere to the company’s code of ethics. The somewhat lower percentages for the U.S. (82%) and Western Europe (83%) may be due to the fact that in those countries not all directors are company employees and, as a consequence, their conduct may not be governed by the employee code.

Although nearly three-quarters of the survey participants believe that board members should be trained in ethics/compliance programs, the response rate of the different groups varies considerably. A total of 94% of the Japanese participants had this view but director ethics training was endorsed by only 42% of the Western European respondents.

The widespread enthusiasm for director ethics training does not always result in action. Only in Western Europe is there a rough comparability between support for the process and its prevalence. In other areas, roughly 40% of the companies have director training on ethics/compliance issues. The figure is considerably higher in Japan, where two-thirds of the responding companies have some kind of ethics training for directors. While it is unusual for most companies to rely on consultants to facilitate this process, nearly half of Japanese companies (42%) do so.