Boards must take control of setting a company’s ethical values and be prepared to dismiss chief executives whose values are not compatible with the culture they seek, says the Institute of Business Ethics.
A report by Peter Montagnon, the IBE’s associate director, says boards need to set appropriate values and understand how to influence behaviour throughout the company so that employees will make good decisions. They also need to understand where their oversight role begins and ends and what is the operational role of the management.
The study comes as trust issues continue to dog corporations, seven years after the start of the financial crisis. The Financial Conduct Authority warned the finance industry last week to prepare for more fines, citing fresh examples of “bad conduct”, such as misleading letters that appear to be from lawyers or bailiffs to get their customers to pay off debts.
A recent Populus/FT survey found that 61 per cent of voters wanted the party that won next year’s general election to be tougher on big business, following controversies over issues such as executive pay and tax avoidance.
Board members should assure themselves that management processes were encouraging the right sort of behaviour, the report said. Incentives should be based on non-financial as well as financial performance, and targets should not undermine the company’s ethical values.
“Culture affects a company’s ability to generate value. A strong culture makes for sustainable value-creation. A weak one can destroy the business overnight,” said Mr Montagnon.
“This is why boards must be involved and not simply relegate culture to compliance teams. Directors have to understand how values influence the business model and what drives good behaviour by employees.”
Sir Win Bischoff, chairman of the Financial Reporting Council, said “The public has rarely been more cynical about big business; trust is at an all-time low. Strong and demonstrable ethical behaviour is critical to win back and retain trust among customers and investors.”
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