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.

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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?

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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.

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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

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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.

Awareness of our own motivations, biases and ethical reasoning styles can help us understand what we bring to the board table when it comes to ethical decision-making.

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Perspectives to frame board conversations Key questions to frame board deliberations

Lens 3: Interpersonal relationships Lens 1: General influences and reasoning

What aspects of the organisation’s strategic Have you considered how group dynamics impact on environment are relevant to the decision? board discussions, including how your own default ·· Are there factors that lie beyond the scope of the board decision-making style fits in? papers? What is the connection between this choice and ·· Is there too comfortable a drift towards agreement? Or is the long-term prospects of the organisation? there an active effort to promote and manage diversity, and recognise and encourage differences of perspective? ·· Whose interests deserve to be taken into account? What are their interests? To what extent are those ·· Are the opinions of some directors too easily dismissed interests aligned? because they are not subject matter experts? Are the opinions of some directors given too much weight ·· How do we wish to position the organisation? As a because they are subject matter experts? leader on such matters? As a close follower? Doing the minimum required by law or regulation? ·· Does the board identify and question the assumptions on which recommendations are based? Are directors Lens 2: The board’s collective culture given the time and opportunity to offer critiques of and character their own arguments?

Does the board as a whole have a culture that enables and supports ethical considerations, Lens 4: The individual director including calling on the organisation’s Is each director aware of their personal ethical ethical framework? position and how it might differ to that of ·· To what extent is the decision before the board clearly the organisation? linked to the organisation’s purpose, values and ·· Do your personal values and principles align with those principles? of the organisation?

·· What impact will the board’s decision have on the ·· Do you understand your own motivations and biases? culture of the organisation? How would your motivations look from an external ·· Is the board’s decision framed in language that will perspective? resonate within the organisation? ·· Do you recognise your own preferred style of decision- ·· Where are the potential ‘ethical blind spots’ on the making? Are you open to different approaches? board? For example, is the proposed course of action ·· Are you able to recognise and declare when you are being recommended for no better reason than ‘out of your depth’? If so, have you sought counsel ‘everyone does it’? (if appropriate)? Are you prepared for potentially difficult debate?

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company has invested heavily in its liberty and the rule of law. As such, reputation as a ‘responsible citizen’, you are reluctant to prevent people A practical encouraging employees to build from making their own choices about and sustain relationships within the how best to live their lives. Yet, you example: local community, especially through also know that tobacco products the sponsorship of local sporting contain some of the most addictive teams. More recently, the company’s substances on earth and that, for at Scenario employees have been driving a strategy least some of the store’s customers, You are one of seven directors to increase the range of fresh foods the image of free choice is an illusion. serving on the board of – all with an emphasis on improved NOVASTORES – a listed company personal and community health. Analysis that is a general retailer of food An analysis of the four lenses (as and commodities. The board Lens 3: Interpersonal presented above) reveals a company has been asked to approve relationships and reasoning that is, in fact, on something of an a policy to remove tobacco NOVASTORES was originally founded as ‘ethical precipice’. NOVASTORES’ core products from sale at all of its Thompson’s – a family owned company values and principles are directed in stores. This will involve some that built a retail ‘empire’ made up of favour of ‘consumer sovereignty’. The loss of profit, but the company small to medium shops located in rural emphasis on choice – as a core value – will be exiting a market with and regional communities throughout implies that tobacco products should declining sales due to the the Eastern States of Australia. The continue to be made available. While reduction in demand. The board company was listed three years ago, it could be argued that the values is asked to approve the policy in and still retains on its board three of quality and trust might lead to a general and to set a time frame representatives of the Thompson withdrawal of tobacco products from for complete removal of these family, including the chair. The chair sale (e.g. they have a negative quality products. Total removal could is of the mind that ‘if it’s not broken, because of the danger they pose), to be achieved in 12 months, or at don’t try to fix it’. You are aware that make the decision on this basis would any time thereafter. one of your fellow directors recently be shaky. More convincing might be lost a partner to lung cancer, brought reference to the attitude of employees and the efforts of NOVASTORES Lens 1: General influences on by exposure to passive smoking. Most board discussions are cut short to invest in the good health of the There is now a universal when the chair feels that adequate community. On that basis, the understanding of the dangers of time has been devoted to the relevant continued sale of tobacco might seem tobacco consumption – a product item. The chair’s decision often has to be hypocritical, and damaging to that cannot be used to any degree more to do with sticking to the timing employee morale and brand value. without causing harm. Public in the agenda than reaching an agreed health campaigns are leading to Also, it is clear from Lens 1 that the view. Given this, the chair often a progressive decline in sales of argument about the merits of tobacco simply declares that a matter has tobacco products, especially in the has been settled (at least in the minds been resolved. Other members of the developed world. Yet, despite the of wider society). As such, it is probably Thompson family rarely contribute to concern, tobacco remains a legal just a matter of time before the debate, tending to defer to the chair’s product and smokers may expect product is removed from general sale. opinions and judgement. to find convenient outlets for the In summary: this apparently simple purchase of their preferred brands. Lens 4: The individual decision gives rise to some challenging director ethical issues, revealed clearly through Lens 2: Collective culture the application of all four lenses. and character You are comfortable with the company’s general ethical health. NOVASTORES’ core values are: Choice, Rather than settle the matter here, It is conservative in its approach Convenience, Quality and Trust. The let us delve a little deeper into to business – an outlook that company has one core principle: ‘the the background to ethics in the complements your own approach. customer is always right’. Their logo boardroom – returning to this case You have a strong, personal incorporates the words, ‘Your One once we have some additional tools commitment to the principle of Stop Shop’. On the other hand, the of analysis at our disposal.

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Understanding ethics

What is ‘ethics’? Values and principles shape all One reason is that there is a Ethics is ultimately about the choices decision-making – even when one is tendency to think that it is sufficient we make and their effect on the not conscious of the work they are to meet the requirements of the law. world. Its goal is to enable and doing. As such, ethics informs and Some may be unable to imagine any support thoughtful decision-making underpins all board processes and standard other than a legal standard that is consciously informed by core interactions between directors. as having relevance; that is, “if it’s values and principles. not illegal, it’s not wrong”. “...ethics informs Some modes of ethical decision- However, there are also other making involve the application of and underpins all factors that make the explicit ‘absolutes’ (e.g. theft is always discussion of ethics a challenge wrong, turning a blind eye to board processes and for some directors. corruption is always wrong). Others interactions between 1. The term may evoke anxiety recognise that the hardest decisions arise in the ‘grey zone’ where values directors.” about being judged as a morally and principles of equal weight and good or bad person. Indeed, it can be argued that there merit can and do compete. In some 2. Some people may feel that ethics cases, the ‘least bad’ option might are no aspects of directorship is ‘self-evident’ and that people be the best. that can (or should) exclude a consideration of ethics. Every board are either ethical or they are not. The frequent lack of clarity in ethics decision (including decisions about 3. Some might feel that ethics is is not due to any fault of decision- what to omit from board discussions) entirely subjective – just a matter makers. One can value both candour necessarily reflects the ethical of opinion and a poor substitute and confidentiality. Both are good, approach of the board and has but there are times when they are an effect on the ethical culture of for legal or economic analysis. in conflict. the organisation. 4. The term may evoke suspicion that it is being used as ‘window Given this, we cannot expect ethical Why is talking about ethics perfection from any person. The dressing’ to hide questionable challenging? most we can ask for is sincerity and conduct. skill in decision-making. Given the inescapable influence of ethics in the boardroom, why 5. Ethics is a double-edged sword do people find it so difficult to talk – once invoked it can be turned about this aspect of decision-making? against you.

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Taken individually or in combination, Although we have focused here on possible these reasons can incline directors to tensions, it is worth noting that by openly keep the ethics ‘genie’ in its ‘bottle’. addressing ethical issues, boards can broaden Yet, the failure to discuss the ethical their thinking and reinforce their unity in a dimension does not mean that it is process of open exploration and conversation. inoperative. Ethics is always at work. Boards that fail to make the ethical Ethical challenges identified by directors dimension explicit merely place its In discussions with directors, we have identified dynamics beyond their control. issues that often or necessarily involve ethics. These issues may be overlapping and intertwined. Therefore, directors and boards Some of these may be one-off decisions and should tackle ethics head on and not others will be ongoing challenges. be fearful of discussing matters that evoke strong reactions about what is Ethical issues relating to people, relationships ‘good’ or ‘bad’, ‘right’ or ‘wrong’. and perspectives As we have seen in the example of Ethics may arise in matters concerning the NOVASTORES, the practice of ethics personal abilities, capacities, knowledge, can confront a director with the dedication and interests of board members uncomfortable fact that personal or employees. It may also arise in relation and organisational values and to relationships, including interpersonal principles are not always aligned. relationships, disagreements and friendships. Resolving such tensions in the boardroom requires directors to expose something of their beliefs and Example: Conflict of interest worldviews. It requires directors to go A long-standing supplier contract is up for beyond mere intuitions about ‘right’ reconfirmation for the first time in your and ‘wrong’. It requires directors to tenure as a director on this board. The board offer and demand good reasons – to has been asked to renew this large supplier challenge, and be challenged on, contract without going out to tender. You the validity and applicability of their are aware that the CEO of the supplier personal ethics. organisation has long standing personal ties to the chair of the board you sit on. You know the chair to be a person of integrity and the supplier to have fulfilled all previous obligations. You don’t want to create a storm in a teacup, but you are uncomfortable with this conflict of interest.

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Ethical issues relating to business practices and decisions Ethical issues relating to an organisation’s place in society Ethics can arise with regards to how an organisation conducts its operations. This can include cultural and behavioural Ethical issues may arise outside the aspects such as workplace culture, customer and supplier operations of an organisation. Such practices and stakeholder relationships. It can also include issues may impact stakeholder trust, the design of systems and processes such as technology organisational reputation, and an and information systems, employment policies (including organisation’s social compact (i.e. diversity, discrimination, and workplace health and safety) and that which mutually binds individuals, remuneration and incentive arrangements for staff and board communities and organisations in members. Ethics may also be involved in strategic decisions the pursuit of a common good). such as workforce structuring and planning, risk appetite, tax There may be an opportunity (or strategies and investment decisions. pressure) to publicly state an opinion on a social or political issue. It may concern industry and supply Example: Stakeholder relationships chain integrity, human rights or Your organisation is in the resources industry. You are environmental sustainability. trying to meet your environmental commitments by investing in renewable resource technologies, including windfarms. You have found a suitable location for a Example: Modern slavery in an new windfarm, but there is push back from the local organisation’s supply chain community. The board is weighing up the interests of As part of Australia’s Modern those locally affected by the proposed windfarm against Slavery legislation, your supporters of the windfarm who promote investment in organisation has been mapping environmentally friendly technologies. its supply chains internationally to identify modern slavery risks. Example: Policies on employee bonuses The management team has Your organisation is looking to reduce expenditure. The identified a risk that forced board is presented with amendments to the bonuses policy labour is practiced in some that generate savings. The current bonus policy means factories that supply your employees who meet moderate targets as well as values operations. Your legal obligation and behaviour standards are rewarded. The proposed is to include this finding in your policy requires employees to meet higher targets and has Modern Slavery Statement no values or behaviour requirements. You are concerned and set out the actions the about how this will affect the culture of your organisation. entity has taken to assess and address those risks, including Example: Internal business strategy due diligence and remediation processes. The board is A new tax strategy has been presented to the board and discussing what additional opinions are mixed. The strategy is undoubtedly aggressive actions should be taken to and would lessen the tax liability of the organisation. assess and remediate any issues Your organisation’s lawyers have stated that, while it identified, including monetary may be challenged in the courts, you would likely win any and personnel allocations. Some litigation pursued by the Tax Office. You are unsure about board members are arguing the strategy due to the potential risk of litigation costs and for a minimalist approach reputational damage. But this also sits uncomfortably with that meets your compliance you from an ethical perspective because of your belief that obligations and saves resources. company tax is an important contribution to society. Others are arguing for a much greater commitment.

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A decision-making framework

Ethical issues do not necessarily come flagged as such. For example, Duties of directors paramount there can be an ethical dimension The AICD reminds directors that fiduciary to issues of capital allocation, and statutory duties should be paramount new product approvals, and the in board decision-making. These include the development of key strategic duty of directors to act in good faith, for a partnerships. It is up to directors to proper purpose and in the interests of the identify and draw out the ethical organisation as a whole, acting with care issues in what appear to be ‘plain and diligence. Directors must not misuse vanilla’ business decisions. their position and should avoid conflicts While the Four Lenses discussed of interest and disclose material personal above are useful for revealing the interests. Directors must also comply with range of ethical issues that can be further directors’ duties applicable to their embedded in a decision that comes organisation and sector. before the board, it is also important that directors have access to a reliable and replicable process for In a number of respects, it mirrors the decision-making. architecture of general decision-making tools. However, this process has a number of distinct The model that follows has been features that are highlighted below. developed by The Ethics Centre to meet that test. The broad outline There are five steps in this process: ·· Frame ·· Shape ·· Evaluate ·· Refine ·· Act

Each stage is described in greater detail on the following page.

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This five-phase process offers Phase Purpose Core Questions a clear and simple basis for Frame To define and ·· What are the facts? addressing the ethical dimension of any decision. As with all understand ·· How are these facts linked to the organisation’s the precise core values? processes, it is not a substitute for nature of the judgement. In The Ethics Centre’s ·· What assumptions are being made about the world issue to be view, if rigorously applied, it will in which this issue is being decided? decided. ensure that decisions made in the ·· Are there any ‘non-negotiables’ (e.g. relevant laws boardroom are ethically defensible that must be obeyed)? – even if they are controversial in ·· Whose ‘voice’ should be heard (i.e. who has a the eyes of certain stakeholders. legitimate interest in this matter)? ·· What is the nature of each legitimate interest? Are It is the combination of the the interests aligned or divergent? Four Lenses and the Five Phases that ensures that directors are Shape To develop ·· What kind of issue are we dealing with? Is it just a well-equipped when it comes to options that moral temptation (the possibility to benefit from managing ethical complexity. In could resolve doing something questionable)? Or is it a genuine light of this, let’s revisit, in greater the issue. dilemma in which competing values and principles detail, the Four Lenses. Some of these seem to require incompatible outcomes? options will ·· What are the options? This is both the most have been creative and difficult part of the process because developed by nothing should be ‘off the table’. Every option, management, including the apparently outlandish, should be others by considered as that is where ‘inflection points’ (see directors. further the Appendix) can be found.

Evaluate Apply a ·· Take two or three of your best options and apply matrix of the matrix (as set out in the Appendix). values and ·· The matrix approach recommended in the principles to Appendix is solid in its form but flexible in its evaluate the content. The purpose of the matrix is to ensure options. that, as a minimum, an organisation’s values and principles are used as the ‘index for judgement’.

Refine Identify and ·· Play the Devil’s Advocate by taking up the option eliminate that has fared best in the matrix in order to weaknesses in identify its major areas of weakness. the proposed ·· Adjust the proposal to eliminate the weakness course of without damaging the overall integrity and utility action. of what has been proposed. ·· Put the proposal to some final tests, such as: how would I feel if this was done to a loved one? Would the person I admire most in the world do this?

Act All ethical ·· Give effect to your decision. decision- ·· Monitor the outcome. making is ·· Offer reasons for your decision, even if it’s not practical – it challenged. ultimately requires that ·· Reflect on the decision and what can be learned a decision be from the process and applied in the future. given effect.

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LENS 1: General influences

Organisations are participants in society. They are subject Seek broader frames of reference to a number of external factors, most of which they There is value in seeking out information beyond cannot control. These factors include: the transformative the board papers to gain further insights about effects of new technologies, shifts in the geopolitical your organisation and the ethical implications of environment, alterations in the natural environment, and its strategic environment. changes in community standards and expectations. A board is only as good as the information it interrogates. Most (if not all) of these external factors have profound ethical implications for organisations. For example, will ·· A new perspective may reveal new challenges and new technologies like AI and robotics significantly reduce opportunities. Management may be affected by the need to employ human beings? If so, how will the the very human tendency to present information transition be given effect? Will the transition be just and that supports its recommendations. As such, there orderly, or unfair and chaotic? Is this a matter that an is a risk that selection bias will shape the way in organisation can decide for itself, or is it bound to engage which critical facts are presented. Directors can in public advocacy to shape public policy in a supportive temper this tendency by requiring that board direction? Is doing the right thing by employees compatible with the economic sustainability of the enterprise? papers link the selection of facts, in support of a recommendation, to the purpose, values and It is important to identify the ethical dimensions of the principles of the organisation. Directors can identify strategic environment and their relevance to the decisions and test underlying assumptions about how the at hand. world is (or might be) and the implications of this for the decision that is to be made.

What aspects of the organisation’s strategic ·· Know your organisation from different angles. It is environment are relevant to the decision? important to identify patterns in past decision-making. ·· Are there factors that lie beyond the scope of the Is there a default way of resolving tensions, making board papers? What is the connection between trade-offs and relieving pressure points? Is there a risk this choice and the long-term prospects of the that the board will not recognise the emergence of organisation? novel situations requiring novel solutions?

·· Whose interests deserve to be taken into account? ·· Engage with internal and external stakeholders. It What are their interests? To what extent are those is important that the board identify, where possible, interests aligned? all those with a legitimate interest in a matter that is before it. A board may need to seek out views beyond ·· How do we wish to position the organisation? As a those readily available in the form of shareholders and leader on such matters? As close follower? Doing the powerful stakeholders. It is surprising how often a voice minimum required by law or regulation? from the margins can present a perspective that unlocks a solution to an apparently intractable problem.

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Example: Seeking out different voices and perspectives Example: When organisations take a stance on a social issue In an organisation which was hung up on process and had an air of defensiveness regarding the relationship with In discussions with AICD directors, an management, it was difficult for the board to receive and example raised was the fact that well-known trust the information being presented by management. organisations took public stances to support The board tried to solve this ‘climate of fear’ by trying a same sex marriage. Directors indicated that new approach. They asked junior employees to present this was an ethical decision, and may have to the board about their projects. This was viewed as a been risky given that it could have impacted development opportunity for junior employees, which they organisational reputation positively or enjoyed. It also helped board members grasp what was negatively. Considerations about whether happening from a different perspective and took away the this public support was appropriate included: ‘us and them’ mentality. ·· The views of, and impacts on, employees and customers. Should it matter whether Strive for organisational ethical leadership the majority of staff and customers agree with the stance? Is there a need to be Every organisation, no matter how small or large, has an representative? impact on the world and shapes the present and the future. ·· Directors perform multiple roles in society. All are citizens. All ·· Given organisations have a different have family relationships of one kind or another. The decisions voice and power from civil society and that directors make within the confines of the boardroom government, is there a duty to bring that impinge on these wider roles – through the conduct of the perspective to the table? organisation on whose behalf they deliberate. It is important ·· Is it possible to separate the personal views for directors to recognise that organisations are ethical and interests of board members from the actors that cannot be divorced from the norms of the wider stance taken by the organisation? When societies in which they operate. In The Ethics Centre’s view, is this ‘pushing one’s own barrow’? Is that perhaps most importantly, many owners of corporations enjoy a conflict of interest? Or is it legitimately the legal privilege of limited liability. Like incorporation, the bringing values and leadership to the table? maintenance of limited liability depends on the continued agreement of society. Corporations that behave with ·· Is there a line demarcating issues that indifference to the interests of society risk causing society to organisations should take a view on? For review and revoke essential privileges. example, is advocating for tax reform acceptable, whereas taking a stand on ·· This extends to engaging with systemic and global issues that certain social or political issues is not? the organisation indirectly navigates and for which there is no individual ‘owner’. Examples of such issues include climate ·· What linkages to operations need to be change or injustice in supply and distribution chains. made before organisations can engage on issues of public interest such as ·· Directors and the organisations they direct are not required environmental or human rights issues? ESG merely to follow community opinion or expectations. Instead, (environmental, social and governance) directors should be encouraged to develop their own view matters are increasingly of interest to of what ethical leadership looks like, having regard to the institutional investors, and the boundaries organisation’s ethical framework – its purpose, values and between what is and is not a business principles. A strong ethical framework can provide a board interest are shifting. with the basis for defining the organisation’s place in the world – as a matter of choice rather than in conformance with the wishes of others (whether they be shareholders, employees, governments or community activists).

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LENS 2: The board’s collective culture and character

Every organisation and board is unique, and the Know the purpose, values, principles and lived culture and character of the board should reflect culture of the organisation the purpose, values and principles (the ethical Boards should use their organisation’s purpose, framework) of the organisation. However, other values and principles (the ethical framework) dynamics (for example, membership and history) as an explicit basis for good decision-making. and structures (for example, committees) also play a role. All these factors give rise to particular ·· Consider establishing a formal protocol for ethical challenges. assessing decisions against the organisation’s purpose, values and principles. Boards can encourage management to address the ethical Does the board as a whole have a culture dimension of decisions in board papers, where that enables and supports ethical considerations, including calling on the appropriate. Such considerations should not organisation’s ethical framework? be reserved for a narrow class of ethical issues. Ethical considerations are as much an issue ·· To what extent is the decision before the when making capital allocations as they are board clearly linked to the organisation’s for customer-facing matters. For example, purpose, values and principles? a board’s decision to withhold investment in ·· What impact will the board’s decision have appropriate IT systems can lead to sub-optimal on the culture of the organisation? outcomes for customers, employees and the company as a whole. ·· Is the board’s decision framed in language that will resonate within the organisation? ·· Cultivate the capacity to look at decisions through the lens of culture and not just ·· Where are the potential ‘ethical blind spots’ outcomes. It is important for boards to identify on the board? For example, is the proposed what signals might be sent by the policies course of action being recommended for no they adopt. For example, if a company claims better reason than that ‘everyone does it’? to value trust but puts in place a compliance program based on radical transparency (surveillance), employees may conclude that trust is not truly a core value.

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·· Frame decisions – and the reasons behind Consider the character traits them – in explicit ethical terms. There is no of the board single, uniform ‘language of ethics’ used by Boards have differing histories, dynamics all people. Some people judge the ethics of a and driving forces which affect their course of action according to the outcomes it character traits. produces. Some look at whether or not certain The character of the board affects the way duties have been fulfilled. Others are deeply directors raise, discuss and resolve issues. concerned about the way in which decisions leave an indelible mark on the character of the Understanding the character of the board can help organisation. Directors need to manage multiple you understand patterns of behaviour that both ethical ‘languages’, and embed them in reasons, positively and negatively shape board decisions. so that they speak to all relevant stakeholders Once you understand this, you will be better and not just those literate in the preferred placed to challenge potential ethical ‘blind spots’. language of directors (whatever it might be). Ethical blind spots arise out of being conditioned by experience to see the world in a particular way. For example, an experienced lawyer runs the risk Example: Practising ethics leads to of seeing all issues in exclusively legal terms. Of benefits for the organisation course, this risk is not always realised. However, the best protection against conditioned blindness A board, which did not have a practice of (a species of group think) is to be aware of the overtly considering ethics, was revising the risk. Otherwise, boards can quite inadvertently organisation’s investment strategy. The board miss seeing issues that give rise to ethical risk. was discussing whether the organisation should invest in organisations manufacturing bullets and organisations contributing to “Understanding the deforestation. Although those investments character of the board were legal, the board decided against them. can help you understand The discussion about ethics, trade-offs and grey areas led the board to think about other patterns of behaviour matters, like workplace health and safety and how ethical standards could be set above that both positively what was required by law. and negatively shape The more the board considered ethics, board decisions.” the more issues they found had ethical dimensions. The more the board required ethical considerations to be presented, the more management deliberated on these questions also. Over time, this practice of ethics affected both the board’s culture and the culture of the organisation.

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Does your board incorporate diverse ethical perspectives?

Issue Relevant considerations Example

Form over In the final report of the Financial Services Royal Commission, A mining company has offshore substance Commissioner Hayne argued that while the law sets the operations in a country with laws standard for formal accountability, the law itself should be in that impose only minimal safety accordance with what he called ‘fundamental principles’, being: standards. A number of competitors take advantage of the limited legal ·· Obey the law; protections to reduce their operating ·· Do not mislead or deceive; costs. Management calculates that the ·· Act fairly; company could substantially increase profits by adopting a standard lower ·· Provide services that are fit for purpose; than that which applies in Australia. ·· Deliver services with reasonable care and skill; and Should the board approve a standard ·· When acting for another, act in the best interest of that other. of safety that complies with local laws or insist on standards that exceed the In turn, he argued that any reasonable person should minimum required? understand and apply those principles rather than push the limits of the law.

Directors need to be conscious of the risk that they adopt too narrow an ethical perspective. For example, if all directors think that issues should be determined in terms of their consequences, they may miss cases where the key risk lies in, say, managing relationships.

Passion over A strong sense of purpose can be a positive source of value A company is led by a CEO who reason through, for example, motivating employees and aligning believes that its products will change stakeholder interests. However, a passion for purpose can be the world for the better, while detrimental to good governance if it is used as a mechanism generating a healthy profit. The sales for silencing dissent or to deny practical realities that affect team is incentivised to adopt high the interests of the organisation: for example, if a founder pressure sales techniques in the belief stifles innovations that challenge their original vision. that this is not only good for the company but also the consumers. The CEO sits on the board and shuts down any questioning of the sales tactics by suggesting that critics do not understand the noble purpose of the company and the good that it is doing.

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Issue Relevant considerations Example

The need to Directors rightly prize their ability and duty to provide oversight Some directors are brilliant at be right and guidance by asking tough questions and having frank spotting the fatal flaw in a plan and fearless conversations. Indeed, questioning facts and or board paper. The ability to spot assumptions is an essential aspect of ethical decision-making. weaknesses is a critical skill. However, some directors take this ability to a However, questioning needs to be constructive. Directors point of destruction, always finding should not feel compelled to win every argument – if this is at fault but never proposing a positive the expense of other directors feeling comfortable to express plan for resolving the problem. a different point of view. There is a difference between robust debate and ‘brow-beating’ of a kind that closes down debate.

Collegiality vs It is important that directors on a board enjoy positive Would you be comfortable calling out Concurrence relationships that foster collaboration and the honest a potential conflict of interest of your exchange of diverse opinions. However, there are risks when good friend who is also on the board? the expectations of collegiality give way to an expectation of concurrence. Good boards encourage evidence based, principled Would you be comfortable questioning disagreement and cease to perform their proper function if a the insights of a recent strategy concern for collegiality gives way to ‘group-think’. proposal developed by a well-liked CEO?

Legacy Long-lived organisations with a well-known history can reap Kodak was proud of its heritage and the rewards of a compelling narrative. However, fear for an was correspondingly slow to adapt organisation’s legacy can also make it slow to adopt new ideas to the age of digital photography. and practices. Others anticipated the changes and their effects. What was it about the Skilled directors navigate both sides of legacy – with an eye to composition and culture of Kodak’s preserving what is valuable in the past but not at the expense of board that led it to not reposition for innovation. The most dangerous words to be heard around any the future? board table are, ‘we’ve always done it that way’ or ‘that’s just the way we do things around here’.

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LENS 3: Interpersonal relationships and reasoning

Boards are collections of individuals who bring their own individual Have you considered how group dynamics decision-making style to the board impact board discussions, including how table. Power dynamics exist in any your own default decision-making style group, with each person influencing fits in? and being influenced by others. ·· Is there too comfortable a drift towards Some of your fellow directors may often share your perspectives, but agreement? Or is there an active effort there will be others with whom to promote and manage diversity, and you frequently disagree. Ethics for recognise and encourage differences boards, rather than for individual of perspective? directors, is the practice of group ·· Are the opinions of some directors too decision-making. As such, care is needed so that interpersonal easily dismissed because they are not relationships between board subject matter experts? Are the opinions members do not distort the ethical of some directors given too much weight judgement of the board as a whole. because they are subject matter experts? ·· Does the board identify and question the “Ethics for boards, assumptions on which recommendations rather than for are based? Are directors given the time and opportunity to offer critiques of their own individual directors, arguments? is the practice of group decision- making.”

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Ethics and diversity Insights from an experienced The quality of discussion is enhanced by a non-executive director on gender diversity of directors and differences of perspective. “There is a view that women bring something different to the board Good directors are wary of group think. They also table because they are women. learn how to productively use diverse perspectives. This is true to an extent. Women This requires a high level of self-awareness and have a common experience of the ability to tune into the thinking of others. overcoming hurdles that men have Some techniques to leverage diverse experiences, not had to encounter. But I don’t insights and opinions include: think that women have different ·· Be cautious of uniformity. The enemy of diversity behaviour or character traits (e.g. is not necessarily a dislike of difference but, more compassionate, inclusive, or care about soft issues). Gender rather, an unconscious bias in favour of those driven assumptions about who is who are like us or who confirm our own beliefs. going to care are not constructive. Good boards are built on relationships of trust. Sometimes as a woman I self- It is generally easier to trust ‘people like us’, than edit. I won’t raise a point because those who are different. Yet it is this latter group then I’ll be ‘the woman’ asking the who can add great value to a board’s ethical question. Then I have to double deliberations. Trust based on mere familiarity or correct and ask it anyway.” sameness is of low grade. Far better is that which emerges out of diversity.

·· Be conscious of unwarranted assumptions. It is easy to make ethical mistakes due to reliance “Good directors are on false assumptions. This error extends to any wary of group think. form of stereotype, especially when used as a shortcut to avoid spending time understanding They also learn how the truth about a situation or person. to productively use ·· Aim for effective communication. Directors diverse perspectives.” should be aware of differences in communication styles – in terms of how people both send and receive information. These differences may be influenced by traits such as age, gender, seniority, ethnicity, background, skill set and even mood. Important ethical insights can be missed in cases where, say, a quietly spoken director is waiting to be invited to speak while others are quick to volunteer their opinions. It is important that all of the relevant voices in the conversation be heard – something that may require active management by the chair.

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Group ethical decision-making Some common pitfalls are: ·· Failing to question intuition. involves negotiating different People often approach ethical ethical styles ·· Rushing straight to the issues from an ‘ethical intuition’ (quantitative) result. Some people perspective; firstly, judging what The ‘group struggle stage’ in may favour decision-making based is good and what is right based decision-making is valuable. It is on numbers, as it seems objective not a sign of indecisiveness or an on a gut feel (e.g. we all know and efficient. Numerically- unhealthy lack of consensus. Time right from wrong), and then using backed arguments can appear should be allowed for the process cognitive reasoning to explain to unfold. simpler and more rational than their ethical intuitions. Often, our arguments that do not invoke intuition can lead us astray. For Ethics is the practice of making quantification. However, it can example, inexperienced drivers decisions based on a conscious reduce ethical discussion to a application of core values and will ‘intuitively’ apply the brakes simple trade-off of known costs principles. It draws in all who have a if their car enters into a skid, but against known benefits (including legitimate voice in the conversation, with adequate training a driver can including those whose interests might social or environmental costs and learn to accelerate gently out of a diverge. It is important that multiple benefits). This can result in missing skid; that is, the intuitive response forms of ethical reasoning are important perspectives that are is reprogrammed by knowledge considered in the course of decision- not reducible to numbers, or for and experience. The same is true making. All of this takes time. which numbers do not yet exist. of ‘ethical intuitions’, which may ·· Ignoring flow-on effects. Some be a reflection of the particular people may focus on first-order cultural values we have been effects. These effects are generally socialised with. Alternatively, our clearer and more controllable intuition may be the product of than second-order and flow-on confirmation bias, the tendency effects. However, questioning what to interpret new information as the flow-on effects of a decision confirmation of one’s existing may be can avoid unintended perspective. In any case, we need consequences. to be careful to avoid intuition being the expression of mere prejudice.

·· Time pressure. This is a real and practical impediment, and sensitivity to it can aid discussion.

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Be sensitive to power dynamics The role of the chair Boardroom ethics can be strengthened The chair can help each director to be by greater reflection on the way power is empowered to question the ethical exercised – in the boardroom and, more implications of issues and decisions. broadly, in the director community. This will give the board the best chance of being Things to note include: ethically thorough. A good chair will:

·· Boards are collectives but there is increasing ·· use their authority to draw out relevant ethical focus on the individual accountability of issues and perspectives; directors. There is a risk that some directors may ·· notice and manage the personalities in the judge every matter in terms of personal risk, room, so all voices are heard and opinions allowing the instinct for self-preservation to considered; and frame and influence decisions. ·· curb inappropriate boardroom behaviour. An ·· There often are unwritten board protocols that agreed board Code of Conduct can provide a directors consciously or unconsciously follow. useful point of reference. It is useful for directors to understand the way that protocols and power dynamics are influencing their thoughts and conduct. Insights on the role of chairs from an ·· Less-senior directors, who are building their experienced chair portfolio of directorship experience, may The chair is a facilitator (referred to in some feel they need to conform with the views and AICD contexts as a ‘conductor’). As a chair, practices of more experienced peers. it’s important to:

·· Senior directors and chairs can assist by taking ·· have a learning mindset, as there is always positive steps to draw out the views of their opportunity for growth and improvement; less experienced peers and thereby improve the ·· deal with problems, and not let them depth and quality of ethical debate. remain beneath the surface; ·· ‘Out of session’ discussions by directors are ·· bring new blood to the board and draw out a reality for many boards. Floating ideas and the new perspectives that this will reveal; and seeking to understand the perspectives of other directors can be useful, as it can consolidate ·· be aware of board culture and have options and opinions and save time. On the other strong interpersonal skills. Chairs have a hand, it can undermine collegiality, trust and responsibility to help directors (including transparency amongst board members. External new directors) feel comfortable when ‘caucusing’ can also undermine the value of sharing their views. genuine debate among the board as a whole.

·· Conflicts of ideas and perspectives are natural. It is important to approach conflicts with emotional intelligence and patience. Conflicts, if dealt with appropriately, are a learning opportunity to discover and engage with new perspectives. If a conflict does occur, sensitivity to power dynamics can shed light on the manner in which the conflict has played out.

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LENS 4: The individual director

Each person draws on a personal framework of values and It is important to remember that your wisdom and ethical principles. In some cases, the framework is consciously opinions are valid and useful perspectives, and that the held in mind. In other cases, there are unconscious ethical opinions of other directors are also valid and useful. determinants at work. The ability to negotiate ethical differences with others begins with self-awareness. However, directors’ personal values and principles are always subordinate to those of the organisation.

Is each director aware of their personal ethical Understand motivations and biases position and how it might differ to that of the Motivations affect our ability to make unbiased organisation? decisions. ·· Do your personal values and principles align with Directors have various motivations for being on boards, those of the organisation? including ideological alignment, personal growth, ego, societal contribution, skills development and ·· Do you understand your own motivations and career advancement. Sometimes our motivations work biases? How would your motivations look from an unconsciously to make us read situations and apply external perspective? judgements that suit our individual interests. ·· Do you recognise your own preferred style of ·· It is useful for each director to examine her/his own decision-making? Are you open to different motivations. Some questions to ask are: approaches? ·· Is my thinking here at its independent best and free ·· Are you able to recognise and declare when you are from the subtle influence of self-interest? ‘out of your depth’? If so, have you sought counsel (if appropriate)? Are you prepared for potentially ·· Am I giving priority to information or perspectives that difficult debate? confirm what I already believe? Confirmation bias can lead us to ignore valid alternative perspectives.

Acknowledge yourself as an ethical actor ·· Am I keen to agree with a perspective because other people hold this view? Conformity bias can lead us Ethics is rarely a dedicated skillset of any one director. Instead, it is typically an area of general to fail to engage in critical evaluation. experience amongst directors. ·· Am I relying too heavily on the first piece of evidence Directors must be free to comment on: to come to hand? Anchoring bias can make us tend to cut short discussion or expectations. ·· the decision at hand (an issue of ethical content); and ·· Consider the motivations of other directors. This ·· how the board or broader organisation makes decisions must be done without judgement. Rather, it is a way to or behaves (an issue of ethical process). understand others’ perspectives and where their strongly held views may stem from.

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·· Strongly held personal values should not be the only Acknowledge vulnerability motivation and frame for debate. Personal values must Are you able to recognise and declare when you are be balanced with organisational and societal values. ‘out of your depth’? If so, have you sought counsel There are specific risks in not-for-profit organisations, (if appropriate)? Are you prepared for potentially where directors are typically not paid and may have difficult debate? a very strong ideological reason for being associated Given the intersection between personal values and with the organisation. principles and those of the organisation, addressing ·· Sometimes your ‘personal conscience test’ can lead ethical issues can often create a sense of vulnerability you astray. Some directors can be tempted to think in directors, especially if there is a clash of ethical that the proactive and open disclosure of potential frameworks. As such, ethics in the boardroom requires honesty, authenticity and a high degree of trust. conflicts of interest are subject to a form of ‘personal conscience test’. They may mistakenly think that if ·· Take off your armour. If directors approach the one’s conscience is clear, there is no risk of a conflict boardroom wearing impenetrable armour, there will be of interest and there is no need for disclosure. This is the strong temptation to avoid ethical deliberations. The faulty logic and needs to be challenged. best boards leave their armour at the door, something that is only possible where work has been done to build Example: Notable points about conflicts and reinforce trust amongst fellow board members. of interest from ‘Conflicts of Interest and ·· Be reflective. While it is the board’s job to reach Disclosure’ prepared for the Financial Services decisions, it is also important to be reflective. Changing Royal Commission1 your mind may make you feel vulnerable, but it’s a ·· Research has found that conflicts of interest lead legitimate outcome of true reflection. to significantly more bias in advice. ·· Be sensitive. Engaging in ethical discussions in the ·· Susceptibility to self-serving bias occurs at a boardroom means being sensitive to subconscious and unintentional level, rather than others’ vulnerability. deliberate corruption. This leads to rationalisation ·· Be respectful. Directors need to distinguish between of self-serving behaviour. robust questioning and debate and destructive ·· Even when educated about bias, people tend to behaviour that fails to show adequate respect to others. drastically underestimate the extent of their bias, and see themselves as immune from the effects Example: Seeking guidance and support of conflicts of interest. The greater self-control people feel, the more likely they are to place It is important that directors seek guidance and themselves in situations of temptation and the support from other directors, the chair, trusted more likely they are to lapse. confidants and mentors. Of course, this must be done within the bounds of directors’ duties and ·· Policies to prevent conflicts of interest are more confidentiality. effective than policies to manage them. Seeking support can help you stay grounded and also lift you up. By expressing your doubts, you can find confidence. By seeking another opinion, you can firm up your own thinking. ‘Downloading’ with other directors can put things into perspective and release the emotional charge from an issue.

1 Suita Sah (2018) ‘Conflicts of Interest and Disclosure Research Paper’ for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry accessed 2 July 2019 at https://financialservices.royalcommission.gov.au/publications/Documents/research- paper-conflicts-interest-disclosure.pdf

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Conclusion

There is a growing awareness that This guide does not attempt to the gap between financial and provide an answer to the many non-financial risks is often illusory. specific ethical questions that Ethical failure consistently destroys directors will need to answer. value, especially in companies where However, it is a guide to how one significant value is in intangible might usefully go about that process. assets such as goodwill. Attempts to The methods it proposes and the prevent ethical failures by relying on considerations it recommends will not increasingly comprehensive systems ‘stick’ immediately. The skill of ethical of regulation, surveillance and internal decision-making is only refined with compliance are insufficient. This was practice, leading to an improvement predictable, as the compliance ‘cure’ in both speed and accuracy. might address symptoms, but not the underlying causes. We recommend that boards engage in that practice, both at the level of Company directors can address the individual directors and as a whole. ethical foundations of corporations It is useful to take a spin on the and the markets within which they equivalent of an ethical ‘skid pad’ – operate. The decisions they make testing judgements and improving will shape both government and processes. Individual directors can community responses. No longer also seek to understand their own is it prudent to look merely to the default decision-making style, law for guidance. Directors should thus enabling them to move from become more adept at managing a certain position, especially when ethical complexity – recognising that navigating complex terrain in the the decisions they make ultimately company of others with a different shape the character of organisations outlook on life. and their impact on the world. None of this is easy. All of it is possible.

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Acknowledgments

This guide is based on the insights of The Ethics Centre and draws on the experience of AICD members, and other subject matter experts, who participated in interviews and roundtable conversations. We thank them for generously sharing their knowledge, experience and reflections.

We would also like to thank the members of our Advisory Panel: Lynn Ralph FAICD (Chair), Melinda Conrad FAICD, Bruce Cowley FAICD and Dr Sally Pitkin FAICD. We are grateful for their guidance.

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APPENDIX The decision-making framework and matrix

The model that follows has been developed by The The broad outline Ethics Centre to provide a reliable and replicable There are five steps in this process: process for decision-making. ·· Frame In a number of respects, it mirrors the architecture of general decision-making tools. ·· Shape However, this process has a number of distinct features that are highlighted below. ·· Evaluate ·· Refine

Duties of directors paramount ·· Act

The AICD reminds directors that fiduciary and Each stage is described in greater statutory duties should be paramount when detail on the following page. making decisions for their organisations. These include the duty of directors to act in good faith, for a proper purpose and in the interests of the organisation as a whole, acting with care and diligence. Directors must not misuse their position and should avoid conflicts of interest and disclose material personal interests. Directors must also comply with further directors’ duties applicable to their organisation and sector.

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Phase Purpose Core Questions

Frame To define and ·· What are the facts? understand the ·· How are these facts linked to the organisation’s core values? precise nature of the issue to be decided. ·· What assumptions are being made about the world in which this issue is being decided? ·· Are there any ‘non-negotiables’ (e.g. relevant laws that must be obeyed)? ·· Whose ‘voice’ should be heard (i.e. who has a legitimate interest in this matter)? ·· What is the nature of each legitimate interest? Are the interests aligned or divergent?

Shape To develop options ·· What kind of issue are we dealing with? Is it just a moral temptation that could resolve the (the possibility to benefit from doing something questionable)? Or issue. Some of these is it a genuine dilemma in which competing values and principles options will have seem to require incompatible outcomes? been developed by ·· What are the options? This is both the most creative and difficult management, others part of the process because nothing should be ‘off the table’. by directors. Every option, including the apparently ‘outlandish’, should be considered as that is where ‘inflection points’ can be found (see further page 32)

Evaluate Apply a matrix of ·· Take two or three of your best options and apply the matrix (as set values and principles out below). to evaluate the ·· The matrix approach recommended below is solid in its form but options. flexible in its content. The purpose of the matrix is to ensure that, as a minimum, an organisation’s values and principles are used as the ‘index for judgement’.

Refine Identify and ·· Play the ‘Devil’s Advocate’ by taking up the option that has fared eliminate weaknesses best in the matrix in order to identify its major areas of weakness. in the proposed ·· Adjust the proposal to eliminate the weakness without damaging course of action. the overall integrity and utility of what has been proposed. ·· Put the proposal to some final tests, such as: how would I feel if this was done to a loved one? Would the person I admire most in the world do this?

Act All ethical decision- ·· Give effect to your decision. making is practical – ·· Monitor the outcome. it ultimately requires that a decision be ·· Offer reasons for your decision, even if it’s not challenged. given effect. ·· Reflect on the decision and what can be learned from the process and applied in the future.

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The Matrix – (to be used in the The simple form of the matrix is as shown: ‘Evaluate’ stage in the decision- Options Value or principle making framework) V1 V2 V3 V4 V5 P1 P2 P3 P4 With few exceptions, management A will present directors with recommendations for how an B organisation should act. These C recommendations will often be in Once the matrix is populated, then it is a relatively simple matter to accordance with the highest ethical determine which options best accord with the nominated values and standards. However, there will be principles. In the example below, Option B satisfies the greatest number of times when ethical issues are at values and principles. risk of being overlooked or where the complexity is such that no clear In using the matrix, organisations will need to determine which values and answer can be recommended. principles have greater priority, or ‘weight’, in comparison to others. For example, priority should always be given to those values and principles These moments are often of pivotal explicitly adopted by the organisation over those that its stakeholders, importance as they represent in general, might apply. Within that list of explicitly adopted values and times when a non-financial risk principles, priority ought to be given to those that most closely align with can be ‘crystallised’ to the point of purpose or that have a particular link to strategic risk. For example, mining representing financial risk. In these companies will typically prioritise the value of safety over that of efficiency. moments, it is important to apply Both values are of importance – but safety is of prime significance given a comprehensive framework for the level of risk encountered in most mine sites. However, values can shift assessing the options before in terms of their relative priority. For example, it will be interesting to see if the board. this prioritisation changes in line with the automation of mining operations – with humans playing a decreasing role at ‘the coal face’. The matrix approach recommended below is solid in its form but flexible Options Value or principle in its content. The purpose of V1 V2 V3 V4 V5 P1 P2 P3 P4 the matrix is to ensure that, as a minimum, an organisation’s values A     and principles are used as the ‘index B         for judgement’. C      

A practical example The content of the matrix is – as a minimum – the values and principles of the organisation. So, in the case of NOVASTORES (refer page 8), its matrix would be as shown below. To recall: You are one of seven directors serving on the board of NOVASTORES – a listed company that is a general retailer of food and commodities. The board has been asked to approve a policy to remove tobacco products from sale at all of its stores. This will involve some loss of profit, but the company will be exiting a market with declining sales due to the reduction in demand. The board is asked to approve the policy in general and to set a time frame for complete removal of these products. Total removal could be achieved in 12 months – or at any time thereafter.

Options Value or principle Choice Convenience Quality Trust Customer is always right Stop selling Continue selling

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Other considerations: Extending the matrix ·· Would I be proud to see this fully disclosed? As noted above, there is no set content with This is a version of the famous ‘sunlight test’ which a matrix must be populated. It is largely a that champions the corrective effects of matter of determining the ethical framework of transparency. It is important to note that this the organisation. However, it is also possible to question does not seek to determine what would extend the matrix to take into account a wider set be popular in the eyes of others. Rather, it calls of ethical considerations that would typically be on directors to decide if they would be proud to drawn on in wider society. stand by their decision in the ‘full light of day’.

We have produced below a list of core principles ·· Does this respect fundamental human rights? that are of that kind: The United Nations has affirmed that there ·· Would I have this done to me? This is derived is a set of fundamental human rights that from the established principle of ‘do unto others each person and organisation must respect – as you would have them do unto you’. In one whether or not bound by formal laws to do so. form or another, this principle of reciprocity Human rights are being invoked with increasing occurs in many cultures across the world. frequency – for example in objections to modern slavery. ·· Will this produce the best outcome? There is a long tradition of deciding matters according to ·· Does this show a proper care and regard for their consequences. A key related question for a others? This question seeks to look beyond director becomes, ‘what then counts as a good issues of formal reasoning to invoke a notion of outcome’? This question drives back to the issue care for others. As much as anything else, this of an organisation’s values (which define what draws on an intuitive sense of how others might is ‘good’). It also invites directors to consider be affected by a decision – in terms of basic how outcomes for the organisation should be well-being and welfare. balanced against those for its stakeholders - ·· How will this decision shape the character including wider society. and culture of the organisation? This is an ·· Would this make a good rule for all? This often neglected question – but may be one of question tends to focus on issues of rules and the most important of all for directors. Every duties – some arising from actions like promise- decision by a board helps to shape the ethical making, others embedded in legislation and environment of an organisation. Even apparently regulation, and others being the product of mundane matters of policy can be rich in their reason. Directors answering this question symbolism – conveying messages about what is are required to look behind the rules to see what truly valued within the organisation. issue of substance they are attempting None of these questions is required to be asked. to address. They are not necessary components in any matrix. However, boards may find them a useful complement to their decision-making.

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A note about ‘inflection points’ As noted above, the really tough decisions are Insights on the role of chairs from an those in which equally valid values and principles experienced chair require opposed courses of action. This is, of A construction company had built its course, the source of the evocative image of reputation for integrity over a thirty- being ‘caught on the horns of a dilemma’. year period during which it honestly and accurately estimated the time and cost While it is common for boards to be frustrated by to complete projects. However, in recent the apparent impossibility of deciding every issue times, it was losing market share to in clear terms, it is frequently the case that an competitors who would offer unrealistic apparent dilemma can be resolved by discovering estimates of time and cost simply in order or creating an ‘inflection point’ – the point at to win work – which would neither be which the underlying terms of a dilemma can be finished on time or on budget. The good revisited and new possibilities explored. reputation of the honest builder could not Inflection points most often arise at the second compete with the cut-throat tactics of its phase of the decision-making process outlined competitors. The honest builder was going above – when one is shaping the options. This out of business. So, should the builder stick is when the process is most creative and when with its builder principles and risk ruin or apparently ‘foolish’ considerations can be most join the ‘rats in the pack’ by forfeiting its effective (with some modification). In other good name? words, the seeds of a brilliant solution can often The solution lay in the honest builder’s be found in the ground of an outlandish idea. key strength being combined with an Also, the shaping phase allows a director to take apparently foolish suggestion: ‘why not into account perspectives that were gained in put your money where your mouth is and the first phase – especially from those whose offer prospective clients a bond (10% of legitimate interests might otherwise have been the contract price) that you are willing to overlooked because of their relatively forfeit if you overrun on time or price’? The marginal status. key to the inflection point was this: having offered the bond, prospective clients should be invited to act in their own interest by requiring the same of all competitors. Such a requirement would restore a level playing field and enhance competition - with there being no advantage afforded to those offering unrealistic estimates of cost or time.

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Copyright Copyright strictly reserved. The text, graphics and layout of this guide are protected by Australian copyright law and the comparable law of other countries. The copyright of this material is vested in the AICD and The Ethics Centre. The copyright of the decision- making framework on pages 12-13 and 28-32 is vested solely in The Ethics Centre. No part of this material can be reproduced or transmitted in any form, or by any means electronic or mechanical, including photocopying, recording or by any information storage and retrieval systems without the written permission of the Australian Institute of Company Directors and The Ethics Centre.

© Australian Institute of Company Directors and The Ethics Centre October 2019

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