Governance Bites #76: ethical dilemmas in governance, with Dr Peter Crow

In this episode, Mark Banicevich talks to Dr Peter Crow about ethical dilemmas in governance. Dr Crow outlines the importance of directors' individual values aligning with the entity's values, and they discuss various situtations where the entity's values may conflict when making a decision. Dr Crow refers back to director duties, and the importance of directors knowing these well, and they discuss director options when their values contrary to a board decision. 
* At 24:30, Dr Crow mentions an external resource. You can find it here: https://www.blueprintforbusiness.org/the-principles/
Dr Peter Crow has a PhD in corporate governance and strategy. Not only is he an experienced chair and director, he has also designed and delivered governance courses in New Zealand (for the Institute of Directors, and Governance New Zealand), and overseas, in countries including India, Kenya, Lithuania and Ireland. He has presented about governance on five continents, and he works with and advises boards around the world. 
#governance, #leadership, #corporategovernance, #boardcraft, #decisionmaking, #makingadifference, #ceo, #governancebites

Transcript

0:00

Hello, my name is Peter Crow, independent board advisor, working globally. Today, we're going to roll our sleeves up and have a chat about ethics, and in particular, ethics and board decision-making. Hi, my name is Mark Banicevich. Welcome to Governance Bites. As you just heard, I'm very lucky to spend more time with Peter Crow. Peter, thank you very much again for your time. Pleasure. The topic is a very interesting one about solving ethical dilemmas in the boardroom.

First question: 0:35

how do you approach ethical decision-making when governance issues present conflicting interests? Fascinating, isn’t it? Because we live in an environment where blackness and whiteness is desired. F. W. Taylor, Frederick Winslow Taylor, scientific approaches to management, quantitative analysis - we think there's one answer. We really like the idea of quote - "best practice" - unquote. But with you and your upbringing, me with my upbringing, and different environments, and what is ethically sound for you could be ethically unsound for me – or different versions of "sound enough". And so, good boards, the very best boards, are very clear on how to handle this. What they do is they make sure that the underlying values set and ethical standards, if you will – small "s" standards – are discussed openly amongst the board and executive team. Agreed what they are, the commitment to it is made, they’re written down. It could be in a code of conduct; it could be in some sort of policy statement, some sort of explainer around those values. And that then provides the foundation for the decision-making that sits on top of it. And so even though sometimes a dilemma may be presented where both options are less than ideal, but both options are above the legal minima. So they're inside the legal, we can do them. Yes. But they've got some sort of discomfort from an ethical perspective. And so, my encouragement to boards, and my observation of the very best boards, is that they hold their values to the fore, and they have agreed as a unit and as a whole of business, this is the way we're going to roll. Fantastic. Companies generally will have, these days, a statement of what their values are – usually four to seven words or short phrases to express what their values are. Presumably those values you talk about in the boardroom will align. Will they be identical? Will they be expressed in a little bit more depth? Because I think you need a little bit more depth, potentially, than the four standard company values to solve some of these ethical dilemmas. There’s an interesting physical truth here, and that is that gravity applies everywhere. Gravity is universal. So if we consider that our boardroom and their management and operating structure – the company, not the board, but the rest of the company – might have different values or might have different expressions of those values, sooner or later the staff in the company are going to find out. So if we put a high store on transparency within the business, and then in practice have a low store on it, that's going to show up because that becomes the standard. So water trickles down; gravity is universal. And I’m one of those people that has a very narrow gate on this, that there’s a set of values for everybody in this business. And whether it's a phrase or a single word doesn’t really matter, but there’s a single sentence explainer next to it, what it means. Yes. And so, if I'm considering joining a board, or as now, at the moment, I’m working through an exercise where we've got a board vacancy. And in fact earlier today I had some conversations with some people that have been selected onto the shortlist. We will take them through what our values are. When they get, whoever the successful candidate is, there’s an induction programme. "Here’s how we roll here." And this is the way it plays out. Now, in this particular company, there is a glazed window on the side of the boardroom to the hallway to the rest of the business, and on the opposite side of the hallway are five plaques. And those five plaques are the five core values for the business. There’s a big word, and then there’s detail under each of them. Right. Don’t ask me to recite all the detail, but they're there. And what’s fascinating, over the time that I've been on that board, is the number of directors who have referenced one or more of those when we have had challenging conversations. Right. One of them is teamwork. Okay, yes. Yeah, you certainly must have alignment of values throughout an organisation, from the board through to the shop floor, in order to have a strong culture and have everybody, you know, everyone paddling the canoe in the same direction. Yeah, look, I think that's right. And, you know, there’s a seemingly simplistic – I would prefer straightforward – model when you imagine a diamond, and in the middle of the diamond is the phrase "goal attainment". So if we're going to achieve something, if we're going to achieve our goal, the four points of the diamond are needed. We need to know why we're doing it – so purpose, what's our reason for being as a company? If that's not clear, then we've got a problem, but that's – and then how we’re going to achieve that – so strategy. So it's purpose and strategy. That’s easy. But then there are underlying values, and underlying values are really, really important for what we're talking about because that drives our behaviour standards but also drives our decision-making. The interesting thing is that if any of those four points is either absent or unclear, the chance of attaining the goal drops to zero. And what was the fourth point? So values. Yes. Behaviour standards. Behaviour standards. Purpose and strategy. And strategy. Right, yes, okay. So it's well researched; it's good stuff. It’s easy to understand. And if we’re unclear, the middle bit goes away. Yes. In terms of values, there's some very interesting psychological research about universal values, - Yep. - which I find quite fascinating, particularly when I first looked into it and discovered that not all of those values are positive. Some of them are actually negative values, such as power and greed. Yep. We tend to focus on the positive values when we’re talking about corporates and the purpose of an organisation and so forth. Equally, psychological research has models around ethical decision-making. So we can quite conceivably, and often do, end up in situations where you're making a decision that has two values in conflict. Yep. What are the sorts of things that a board can do to handle those situations where a decision involves conflicting values? I was going to start by going to personal and organisational because, yes, I've got a personal set of values, as you do; they may or may not be the same. But the organisation has got values as well. So if I'm going to be part of this organisation, if I'm going to contribute well, the likelihood of me achieving well is greatly enhanced if my values are compatible with the organisational ones. Yes. And so having the brave conversation around the board table as to what our individual values are and the extent to which they align with the corporate values – having that conversation during the recruitment of new directors – pretty important. Now, in our elected bodies – local councils, government, central government, these others – that's a nonsense because we vote for who we want, and then we’ve got to work it out, and we wonder why sometimes school boards of trustees or local government fall apart and become dysfunctional. But in a corporate setting, in a medium-sized company setting, we've got the opportunity to have those brave conversations. And so for me, the conversation really needs - should - start with agreement around the table as to what our values are, agreement around the table as to why this company exists, and some sort of decision matrix, if you will. And I’m not structuring it up in a bureaucratic sense, but some sort of mechanism, some sort of matrix, that when we’re approaching a decision – and yeah, if we’ve got two competing things and they might have some competing values in there to take the dilemma piece – what is on the acceptable side of the line, and what are we prepared to negotiate on? So there’ll be a red line, and over here, non-negotiable; it's got to comply with all of those. If it's outside that, the answer is no, end of story. Right. Over this side, there’s some highly, highly desirables, but we've agreed they're not back on this side of the red line; we've agreed they’re out here. So here’s your non-negotiables; here’s your desirable, but, oh gosh, if we're really pushed, we’re prepared to let that one go a little bit. And so that’s a very simplistic, straightforward mechanism that companies can use – an actionable insight, if you will. And sometimes boards do that; the very best ones do it regularly and even subconsciously because they know what their values are, they know what’s acceptable, they know what’s not acceptable. Yes, okay. We do have situations sometimes where the incentives of those who work for a company, whether at the board or the executive level, may actually be in conflict with the values. And a particular example of that is short-term profitability. Yep. You know, you’ve got, generally executives have some sort of short-term incentive and often directors will, as well. Yep. They want to be seen in the right light. How do you handle situations where that short-term profitability conflicts with long-term considerations, you know, environmental sustainability, employee welfare, those sorts of things? Or even just doing the right thing. Yes. So we've got some reasonably well-known cases in New Zealand that are live examples of exactly what you’re talking about. And if you'll allow me to describe it in reasonably,

not crass but blunt, terms: 11:28

selling bank accounts to dead people. So, several of the banks in New Zealand and Australia were dragged over the coals because the incentive programs that were in place were such that their salespeople were incented for the number of new accounts that they signed up, and at some point, some accounts were signed up for people that had deceased. Not illegal, absolutely immoral and inconsistent with the bank's values. So, live situation. You can fool some of the people for some of the time, but you can't fool all of the people for all of the time. The fact that you and I know about it is because it got out, simple as that. So, you know the right thing to do, although it might mean great personal cost, is to play to the agreed values. If we're in a situation where we can't live with the values, that's fine; we've still got a decision we can make — do I compromise and stay in because I want the money, or do I hold true and step out? There is no dishonour in stepping out, and I think that, you know, in the modern expression of capitalism, there are certainly some quarters where those standards have been compromised. Equally, the other way, the compromise back here, where we said we’re not prepared to compromise on all this stuff, can lead us to a point where we neglect one of the three important capitals.

So, the three capitals in a business: 13:25

money, people, resources. We know them as ‘people, planet, profit,’ or we know them as ‘triple bottom line,’ you know, whatever it is. But we've got a situation here where we've got social, we've got environmental, we've got economic, and capitalism over the last 50 years in the US has focused hard in on the economic. Yes. And the other two are, within reason, losers, but not necessarily. But they, you know, and that's the way it's packaged up. So the pendulum's swung. So, now we're really interested in social and environmental factors, and I think rightly so. Yes. The risk is that we'll neglect the economic, or the cost of will outweigh the benefits of the whole thing. So, board's got a real challenge in this to achieve a level of balance, pragmatism, because they might need to make decisions that are effectively internally incongruent. Yeah, that came out right. Yeah. So we'd like to do this, but we're not going to because it's not the right thing to do, or it's got some unintended consequences if we do do it. So, we'll come and take another option, but it's got a different set of negatives. Yes. And so weighing that up. So, there's a real challenge for modern boards, I think, all boards all the time, but let's just go with modern boards. We need our boards to be high on curiosity, high on engagement, high on critical thinking. No, not Superman and Wonder Woman, but it sounds like that. We need them to be engaged, to be thinking about the context. Because boards operate within the context of a company; a company operates in the context of a marketplace, we know that, but sometimes we neglect it. Yes. And that then plays back to our dilemmas. Right. I don't know whether you've ever been in the situation — given your extensive international experience, it may have arisen — where you may have legal obligations that conflict with ethical considerations. How does a board cope with those scenarios? It comes down to the individual directors, because in most western jurisdictions, and in fact many others as well, there are seven core duties that directors owe. That directors don't know what those seven duties are is problematic in itself, but assuming they do know what they are, then a director can and should use that as their baseline measuring stick. And so, if a discussion — ultimately a decision that we're trending towards or tacking towards — is going to cause a problem with one or more of those duties, the answer should be, "No, we're not going to do that." But they don't necessarily take that pathway, particularly if they don't know what the duties are. Yes. But then, as you note, there's those personal values or personal ethical considerations, as well. There is no right to be a director. You serve at the pleasure of the shareholders, and you need to be comfortable as a director to understand the environment, understand the context, and be very clear about your boundaries. I had an inquiry earlier in the last 24 hours where I was asked to speak on a webinar — a very gracious gentleman, wonderful organisation, organisation doing some amazing things in multiple countries — and I declined. I would have loved to have engaged, but I declined. Because I no longer deliver talks and webinars online, except in extremely exceptional circumstances. Because the boardroom is a place of collective inquiry, and this was a one-on-one sort of situation, where you've got a range of people on their TV screens, you've got me on my TV screen, and I think there's something missing. So, some time ago, I made this decision and I held it. And I thought that’d be the end of it, but then the gentleman asked whether I might consider contributing in some different way. And so, I think it's really important for individual directors to go into a board appointment knowing the quote "standards" unquote, beyond which they're not prepared to operate, or within which they will operate, and to test that before they get going. Reality check, sometimes they change under your feet. So, it's a live question all the time. And I have had one experience — here in New Zealand, actually, I’ve never seen it overseas — one experience where a director has said he opposed a decision, right, and I observed it, where the comment was basically along the lines of requesting that the dissenting vote be recorded in the minutes, and then announcing straight away that his discomfort was such that he could not offer his consensus to this decision, but he respected that the board had made the decision, so he resigned on the spot. Now that's the sort of a nuclear option, - Yes. - but every director's got that, and a director should not be afraid to utilise that option as an option of last resort. Absolutely. You don't go there straight away, - No. - because that's just threatening behaviour; that's unbecoming. Yes. So yeah. Right, okay. This is a tough field because there's maybes, and degrees, and mights, and could-haves and should-haves. Very much. But very much, you know, this is a grown-up space, and the ethical dilemmas that we're sort of couching around are always in play in some way. One final question for you — we talked in an earlier conversation around crisis situations. Yeah. How does a board ensure, or how does an individual director ensure, that ethical considerations are not compromised when times are really tough, - Yep. - such as crisis situations? Yeah, so, - Excuse me. - the directors need to know where their red lines are, and they need to have those to the forefront. The protection of personal and professional reputation is a very powerful driver in the human psyche. And so, if we're in a crisis situation, it's very, very easy to watch the spill-over on our reputation, and maybe that's the case. We need to be comfortable with that, but we need to hold the line, as well. And so, if - I haven't - but if I was on a board and saw a situation where one of the director colleagues was behaving in a manner that I thought was outside the acceptable ethical bounds, I'd raise it with the chair; I'd raise it with the individual, as well, but, and if the behaviour, as observed, was deemed acceptable or not censured, then that would probably lead me to stepping away from that board.

But look, my counsel is this: 21:36

we need to know where we stand, we need to know where the organisation stands, and we also need to be comfortable that we're not a director by right, and that the company does not owe us a living. Yes. So those are sort of, yeah. I wonder whether I could try and summarise what we've had in our conversation. Off you go. First thing I would say, as a director or pending director for an entity, if you're looking into the roles, know your own values. Yep. So, do your own assessment, - Correct. - make sure, actually write down what your values are. Yeah, correct. When you're looking at an organisation, check the alignment of your values with the entity's values, - Correct. - to make sure that they're aligned. If they're not aligned, don't take the role. Then, when you're in the boardroom, you should have a very clear understanding of what decisions are, as you say, with the red line — what's not okay and what is okay. If you have any challenging decisions that draw some conflict, being open and transparent about what the conflicting values are. Trying to, you know, if you can't reach a consensus, if for some reason you dissent in a decision, is it a deal-breaking decision? Yeah. And if it is, you know, as you say, the company doesn’t owe you a living; you have no inherent right to be there. If your values don't align, and you're not adding value to the organisation, or if you completely disagree with something that has been, and fundamentally disagree, because of course you're always going to have decisions, - Yeah. - or you may always have decisions that you disagree with in some cases. But you can live with some of them, eh. Yeah, absolutely. It's just not the way you would have decided, - Yeah. - but it's not the end of the world. Yeah. But if it is something that contradicts either your values or the values of the entity, then be prepared to walk away. Yeah, I think so. And there's a framework I was familiar with five, ten, or more than five years ago, because pre-COVID. Yes. But sort of ten years ago, Better Boards in the UK. It came out of around some of the Catholic — not religious as such, but some of the Catholic social teaching. And so, they had a five-part framework around personal values and discovery of. And then the overlay brought it up into the team and corporate or organisational level. And this mechanism — I had the good fortune of being in Cambridge University, and they were teaching it. Really, really good, because it got that overlay really clear. And it was the first time I'd seen personal values, corporate values, and the alignment opportunity with some sort of proven mechanism. And I don't know if readers or listeners might be interested; perhaps I could dig it out and you can put it in the notes? [See the episode description for the link.] Yeah, absolutely. Not that it is the be-all and end-all, - No. - but it is one. It's a resource. It's a resource. Yeah, I could do that. That would be magic, thank you, Peter. No, that's all right. It's been, again, a really interesting conversation. We've tackled some pretty interesting issues in the last few conversations we've had, so I really appreciate your time and your expertise, Peter. Thank you very much. No problem. And I'll look forward to seeing you next episode.