South Africa – a world leader in corporate governance
10 February 2016
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Hello and welcome to the latest edition of Old Mutual Live Business, my name is Chris Gibbons. We may not be doing too well in the sporting arena at the moment, but one area in which South Africa is held to be world class is corporate governance. Thanks largely to the work of the various iterations of the King Committee on corporate governance.
Why is good governance in business so important and what role is played in this by ethical behaviour? Cynthia Schoeman is Managing Director of Ethics Monitoring and Management Services. Cynthia, greetings, thank you for joining us here on Old Mutual Live Business. Let’s start at the beginning, why is good governance in a company so important?
Cynthia Schoeman: You know, if one looks at governance and corporate governance specifically, it is a set of a guidelines intended to guide the behavior of directors. The edification of that is directors are the most senior people in the organization and therefore; have the greatest ability and the greatest influence to guide the organization, if you want, for good or for bad. It’s really critical that at that very top leadership level, that there’s a commitment to sound governance.
Do we practice what we preach?
CG: We hear it talked about an awful lot, but do we in fact practice what we preach here in South Africa?
CS: Well, I’d like to think in the main we do, but of course, you know, we do have many examples in the press that really do represent quite significant governance failures. When we’re reading about a huge altercation in a board when we’re looking at board members behaving without an appropriate mandate. That is really a reflection of very serious corporate governance failures.
CG: Your area of specialization, Cynthia is ethics, ethical behaviour in a company, again, let’s just define what we mean by ethics?
What is meant by Ethics?
CS: You know, there are many complex definitions. I rather like, I think ‘cheesy’ is the right word, in saying that ethics simply amounts to doing what is right, what is correct. I love the rider of ‘even when no one is looking’ because, of course, it’s not simply about only doing the right thing.
There are firm and well implemented rules and regulations, or significant consequences. One would like to believe that the right thing is being done because there’s a commitment to behaving properly for the benefit of the organization and its stakeholders.
CG: Why is it, to use your phrase, ‘behaving properly’ good ethics? Why is that so important, why shouldn’t I cut a corner here or take a shortcut there, if I can and if I can get away with it?
CS: I think when we’re looking at a person, at individuals who are being unethical, they’re looking at it as very much in terms of the benefit or the reward. They pinch a Mont Blanc and you know, their gain, your loss. When we’re looking within an organizational context, there are many more parties who are affected by our behaviour. It can be a range of stakeholders who are negatively affected by our behaviour.
A crucial element of what constitutes being ethical, hence taking into account the concerns and the interests of effective parties. Spewing your waste into the river might be a very cheap way of dealing with the waste. But if, in fact, the community downstream is now dealing with illnesses as a result of that, you can see that the impact is really important, so that it doesn’t affect others.
We all need to think how things impact others
CG: In one sense then it’s do unto others as you would have them do unto you?
CS: I like that, I did once hear an American speaker saying, let’s be clear, the golden rule is not do unto others before they have a chance to do it to you. So I often use that in the context of the golden rule of saying absolutely, the reciprocity of one’s behaviour is a core element of managing it.
CG: Can you train people to behave more ethically Cynthia, isn’t this something that should happen, maybe as we’re growing up, as children?
CS: It’s an interesting question and the word ‘train’ is pertinent. Yes, of course, in our upbringing, we’re exposed to all sorts of influences, be it the home, the community, schools or the like. The challenge with that is that you’d appreciate that, of course, we can all be exposed to different influences.
In one instance it might have led to a very well balanced ethical person and in another, they might have come from a community where prejudice or misconduct of many different kinds would be considered acceptable. So the challenge is, coming into the workplace, we have to say people are coming with a range of different values, just to use a collective term.
The role, I believe, is not to now try and teach someone that stealing is bad. They knew that already, but it’s really to sensitize them very clearly to what behaviour is acceptable and what is not acceptable in the workplace.
How to track and monitor ethical behaviour
CG: What about tracking and monitoring ethical behaviour inside a company, is that possible?
CS: It’s definitely, in fact it’s not only possible, it’s essential. You know, ethics is often regarded, incorrectly of course, as somewhat intangible. Of course the minute you can quantify something, especially something like ethics, it gives you a very valuable baseline, if you want, to say gosh; look at this wonderful ethical strength we’ve got in this branch and oh, in these areas of a company we’ve got problems.
Assessing your ethics should really supply you with a sound insight into your risk and it should provide you with a sound insight into where you should act, both to grow ethical strengths and a great vulnerability. Coming back to your point of corporate governance in King 3. Of course as we now know, the assessment and reporting of ethics is now part of King 3, a core part of chapter one and of course it’s echoed in the Companies Act, in terms of the Social and Ethics Committee.
CG: What are the warning signs that things are starting to go wrong?
Be proactive when it comes to Ethics
CS: Well, you know, I hope the warning sign is not that it’s on the front page of business day, you know, that’s quite a late warning sign. I think it can be as simple as having a lot of disciplinary issues. But for me, I certainly try and recommend that one doesn’t wait for the warning signs, that ethics is something that one should be managing proactively. The same as you would look at the growth of your business.
You wouldn’t wait until the business was in decline to say: oh my goodness, we should focus on growth. Similarly with ethics, I really advocate strongly that it’s not a reactor of things. That it is something that we need to engage in regularly and that we should be looking at it in a proactive way. For example, ensuring that our people understand why ethics makes great business sense.
CG: Explain that to me, why does being ethical make great business sense?
CS: Well, I think one of the obvious areas why it makes great business sense is that when you’ve created an ethical culture within an organization. It doesn’t mean that there is absolutely no chance of any ethical failure, that it unquestionably can reduce the risks, the negative cost and the negative consequences that are associated with ethical failure.
We can look at that whether it’s in terms of share prices or huge fines that are levied on organizations and I’m sure half a dozen examples spring to mind. So one of the real business advantages is minimizing those negative costs and consequences.
But I think a real gap, in my opinion, is that there’s not sufficient focus on saying, if we have created an ethical culture, then actually we’re sitting on, what I would call ‘ethical capital’, the same as we’d appreciate customer capital or the likes. If you’re sitting on ethical capital, what are you doing to leverage it and I do see that although, you know, I could list any number of benefits in terms of ethics.
I’ll share a few; I feel like, in my experience, the upside of ethics is not being leveraged and yet we would easily understand that if you’re running an organization that is ethical, as a customer, I’m sitting with high levels of confidence. As an investor I’m sitting with high levels of confidence. Whether it’s customer supply of the community, high trust relationships, all speak to longer-term relationships, which is good for business.
Using Ethics as a creteria for decision making
CG: I suppose a strong ethical framework, a very clear set of values in an organization also gives you a frame of reference against which you make decisions and that’s important in this really high speed world.
CS: I think using ethics as one of the criteria for decision making is a really important step and it’s not actually that complex. Does the decision align with our values, does this decision negatively affect anyone in an unintended way? I think it can be a very useful frame of reference.
I think the more challenging area of, let’s say ethical decision making is when one is looking at what I would label ‘ethical dilemmas’. There there’s not the perfect easy answer because then you’re not looking at the classic right versus wrong challenge. The ethical dilemma is looking much more at a right versus right situation.
So, should you be looking at social development or protecting the environment and we could, of course, formulate many examples where that would have to be your decision. Do you ruin the environment by putting in a new mine and thereby providing incredibly important employment and development opportunities for the local community or which way do you go?
You say no, we’re going to save the environment, and I think especially to senior executives, that area of ethical dilemmas really there, I wouldn’t say they need training. What they need, if I were putting together training for senior executives, is a real understanding of how to best manage those ethical dilemmas because that is a challenging thing.
CG: Cynthia Schoeman, MD of Ethics Monitoring and Management Services, thank you for joining us on Old Mutual Live Business.
CS: You’re welcome.