KEY POINTS:
The recent Sanlu incident and its effect on Fonterra should raise the question for many boards of how they translate their stated ethics into the day-to-day behaviour of the organisation's employees.
Many boards may now feel uncomfortable about how they manage the communication and monitoring of their ethics.
A company's stated ethics are often developed by the board and then included in the company's annual report.
The ethics statement comes from the board because, in the case of publicly listed companies, the board seeks to assure shareholders and the stockmarket that it will act with integrity, will always meet the continuous disclosure requirements of the stock exchange, and that directors will not use or divulge inside knowledge for personal gain.
These statements, with others on ethical behaviour, are included in an annual report and sometimes in a governance section on the website.
Fletcher Building's annual report says: "The company has written procedures to: clarify the standards of ethical behaviour required of company directors and key executives, and ensure observance of those standards through a code of conduct and the terms of reference for directors and management."
You will find similar statements in the annual reports of Air New Zealand, Fisher and Paykel, Telecom and others, and in the policies and procedures of many unlisted companies. Fonterra's website says it has a code of conduct called "The Way We Work", which covers ethics, and the ethical topics covered are listed.
The issue for boards is how to then ensure company employees understand the ethics and use them to guide decision-making and behaviour. Boards' efforts to promote these ethics vary from very little to quite detailed procedures.
The minimal approach can be:
* Ethics stated in annual report and/or board policies and procedures.
* Communication of this to the chief executive via memo.
* Communication process to employees left in the chief executive's hands.
* No measurement process by board.
At the more detailed end of the scale a board might do the following:
* Ethics stated in annual report and/or policies and procedures.
* Ethics melded into a code of conduct and company values.
* Chief executive develops communication process for code of conduct and values. These range from inclusion in the induction booklet, to posters, and sometimes recognition programmes.
* Behaviour consistent with values and code is reinforced through performance appraisal processes.
* Set up ethics hotline to allow confidential whistle-blowing for employees, and a multi-level ethics committee to discuss these and other issues.
* A culture survey each year measures whether people feel the organisation abides by the values and the code.
Obviously, the companies that use something similar to the minimal approach are at risk of the stated ethics being just a piece of paper. But even those with more sophisticated processes may still be at risk - as shown with Fonterra.
One reason for this is that the ethics are almost always written by the board, but the values, or code of conduct, are written and "owned" by the CEO.
The board typically tries to jam its ethics statements into the values or code of conduct, but the result is often a watered-down version of the ethics which then get lost in many other statements.
And because the ethics have come from the board, the CEO typically has less ownership of them, whereas the values are often something he or she and the management team have sweated over.
The result is often understanding and buy-in by employees to the values, a general understanding of the code of conduct, and no conscious acknowledgement of the ethics.
From the outside looking in, this may have contributed to the situation at Carter Holt Harvey in 2006-07, where six executives were prosecuted by the Commerce Commission for labelling timber MGP10 grade when it did not meet that standard.
If six senior executives knew of this ethical breach, then you can almost guarantee there were at least a further 20 managers who knew about it too, and countless other employees. Why was the whistle not blown?
And while the alert was sounded at Fonterra, the board will be pondering why the whistle was blown so late.
The amount of effort a board puts into promoting the ethics will depend on the degree of perceived risk associated with an ethical breach. Many boards will now be reassessing this risk. And the major risk to a company from a breach in ethics may be the long-term damage to the brand and company reputation.
Any board that is leaving the communication of ethical practices to chance is exposing the company to considerable risk.
Don Purdon is an independent management consultant based in Auckland.
