Ethics in the Boardroom
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Ethics in the Boardroom A decision-making guide for directors October 2019 ETHICS IN THE BOARDROOM Purpose of this guide This document has been developed as a guide to Link to additional resources ethical decision-making in the boardroom. Rather · Governing organisational culture. The than focus on the ethical obligations of directors, AICD’s practical tool to help shape it aims to support directors as they navigate the the board’s approach to culture. complex ethical terrain that is encountered in The tool can be found at aicd. every boardroom. This guide does not attempt to prescribe a set of rules for good conduct. companydirectors.com.au/culture. Instead, it aims to complement and inform the · For directors seeking assistance with good judgement that directors bring to their a specific ethical dilemma, The Ethics deliberations. Centre offers the Ethi-call service. The insights that are presented in this document Ethi-call is a free, independent, have been distilled from interviews and roundtable national helpline available to all. discussions with experienced directors and subject It provides expert and impartial matter experts, including senior academics and guidance in relation to ethical issues. board advisers. To book a call, visit the website at The focus of this document is the boardroom; ethics.org.au/initiatives/ethi-call/. the ultimate source of the ethical tone that flows · Membership of The Ethics Centre’s throughout a well-governed organisation. corporate program The Ethics This guide can be used: Alliance unlocks access to The Ethics Centre’s sophisticated decision- · as a general resource for directors; making tool FieldKit. To learn more about the Alliance visit ethics.org. · to identify specific areas for strengthening a au/initiatives/the-ethics-alliance/. board’s capacity in relation to ethics; and · to inform conversations about the ethical dimension of complex issues encountered by individual directors or the board as a whole. aicd.com.au/ethics-guide 2 A DECISION-MAKING GUIDE FOR DIRECTORS Foreword by The Ethics Centre The ethical landscape traversed by The answer is that directors are bound At the most basic level, boards can company directors has always been to apply the values and principles of help individuals working within an complex. They are legally bound the company. However, unlike others, organisation – and the organisation to act in the best interests of the company directors have the capacity as a whole – to consistently make company as a whole. That is, their to define and amend a corporation’s decisions that are ‘good’ and ‘right’. duty is to protect and advance the ethical framework. Indeed, the board They discharge that responsibility interests of an entity that exists of a corporation is, in effect, its mind by setting the organisation’s core only in the ‘abstract’ realms of the and conscience. All that a corporation values and principles – and by human mind. On the other hand, does and its effects on the world, is demonstrating their practical there is a diverse range of real people ultimately traced back to directors and application through their own whose interests are intimately linked their deliberations. Thus, the heavy decision-making and conduct. to and affected by the corporation. ethical burden carried by directors. Acknowledging and addressing the While in the ordinary course of business Fortunately, there are tools available ethical dimension of a sensitive issue there is no direct, legal obligation to to directors to improve the quality can be challenging. However, boards shareholders, the practical reality is and character of their decision- that fail to take account of such that directors are constantly being making. Those tools are informed by matters are not effectively fulfilling pressed to advance the interests of a rich tradition of thinking in which their governance responsibilities. shareholders, as well as employees, humans have sought to analyse and customers, suppliers and the wider improve the way in which we make community. It would be comforting choices – the field of ethics. to think that all interests can be perfectly aligned – at least in the long Ethics both informs the law and goes term. However, that is mere ‘wishful beyond its limits. For the most part, thinking’. The truth is that directors are law sets boundaries for what may or Dr Simon Longstaff AO frequently required to make decisions must be done. Ethics concerns what Executive Director, The Ethics Centre that will annoy one group or another. should be done – even if not required or prohibited by law. Directors will As always, the directors’ touchstone often seek legal advice about what must be the interests of the company can be done. Whether or not to as a whole – not its shareholders, not approach or cross the limits of the its employees, not anyone else. But legal ‘envelope’ of possibilities is how are those interests to be defined? an ethical question. The fact that And on what basis are directors to something can be done does not exercise their discretion? Are they mean that it should be done. to draw on a personal set of values and principles? Are they to attend to the standards of the communities within which they work? Is there a framework of ‘absolutes’ that transcend all other considerations? aicd.com.au/ethics-guide 3 ETHICS IN THE BOARDROOM Foreword by the AICD “Strengthening society through This guide draws on the expertise On behalf of the AICD, we are world-class governance” is the vision of The Ethics Centre, informed grateful to the many people who of the AICD, and core to a strong and by the perspectives of AICD have contributed to this guide, functioning society is a strong sense members in focus groups and including our Advisory Panel. In of ethics. interviews, academics and subject particular, we thank The Ethics matter experts. Centre for its collaboration and There is a growing focus on the expertise in developing this guide. ethical implications of board It is a practical resource and decisions and high expectations applicable to all sectors. It provides We hope that directors and boards of ethical conduct and practice insights on the ethical issues that will find this guide useful. We look from stakeholders, regulators and are embedded in board decisions, as forward to your feedback. directors themselves in the context well as advice and tools for ethical of sweeping structural changes in decision-making. technology and community concerns with equity. Importantly, this is not a new statement of obligations. Directors The AICD is committed to building are bound by fiduciary and statutory the capability of directors and duties, including the duty to boards to tackle this challenging act in the best interests of the Angus Armour FAICD environment. organisation. In many respects, Managing Director & CEO, Australian ethical board decisions sit with the Institute of Company Directors With this aim, we have partnered duty to act in the best interests of with The Ethics Centre on a guide to the members of the organisation as help directors explore the complex a whole, while taking into account ethical terrain that is encountered in different stakeholder perspectives. every boardroom. aicd.com.au/ethics-guide 4 A DECISION-MAKING GUIDE FOR DIRECTORS Table of contents The purpose of this guide 2 Foreword by The Ethics Centre 3 Foreword by the AICD 4 Executive summary 6 Perspectives to frame board conversations 7 A practical example 8 Understanding ethics 9 A decision making framework 12 Lens 1: General influences 14 Lens 2: The board’s collective culture and character 16 Lens 3: Interpersonal relationships and reasoning 20 Lens 4: The individual director 24 Conclusion 26 Appendix: The decision making framework and matrix 28 aicd.com.au/ethics-guide 5 ETHICS IN THE BOARDROOM Executive summary Ethics is the branch of knowledge Lens 1: General influences and practice that seeks to answer The broadest lens focuses the board on issues that affect the practical question ‘What ought the organisation as a participant in society as a whole (e.g. one do?’ This question applies to modern slavery in supply chains, climate change and workforce both individuals and organisations. automation). Ethics is the choices we make and actions we take – as informed by the Lens 2: The board’s collective culture and character values and principles we hold and the purposes we serve – as individuals, The culture and character of the board should reflect the communities and societies. purpose, values and principles (the ethical framework) of the organisation. Ethical issues vary in scope. Some relate to organisational matters, Lens 3: Interpersonal relationships and reasoning such as conflicts of interest. Every director brings an individual decision-making ‘style’ to Others are of broad societal the board table based on different modes of reasoning. concern, such as how to respond to climate change. Personal relationships between board members also affect decisions. This document invites directors to view ethics through four different Directors need to be alive to the need for diverse outlooks lenses. These can be used when and how power dynamics can silence those with considering ethics generally, or unconventional perspectives. applied to specific ethical issues and The chair has a principal role to play in maintaining coherence dilemmas arising in the boardroom. while making the most of diversity. Lens 4: The individual director The narrowest lens recognises that each person is an ethical actor.