6 Improving corporate governance and ensuring improved ethics and probity
In the preceding discussion, the issues of corporate governance surfaced in a number of areas generally related to the ownership, management and performance of SOEs. In the discussion of microeconomic impact, the argument against all forms of state ownership was challenged on the grounds that if appropriate forms of corporate governance were established, the traditional criticisms of state ownership (contractual incompleteness, information asymmetries and undue political influence) could be addressed. Therefore, the improved corporate governance is most needed to address these microeconomic concerns. There are, however, both practical and political reasons why the state may seek to improve corporate governance.
In practice, Government’s relationship with the SOE sector was less than optimal over the past five years. Government’s previous advisers, HSBC, noted in their handover report that a number of overlapping problems arose with the restructuring process between 1994 and 1999. Two of the key problems they raised concerned relationships between various departments responsible for achieving different objectives of Government, and the problematic relationships between Government and the management and/or boards of these enterprises.(1)
The different roles of Government
As noted from the first section, the state has a large number of strategic objectives for the restructuring process arising from the differing roles that it is called on to play. These differing objectives, all legitimate and equally important, are often difficult to reconcile, especially when they are represented by different line function departments:
International experience seems to suggest that restructuring has been less successful when the differing roles of the state overlap significantly.(2) This indicates that the separation of the roles of those tasked with formulating overall state policy, with regulation and with the restructuring process needs to be more clearly defined in South Africa. These issues were resolved at the IMCC Lekgotla in November 1999, where the Ministers agreed that while policy departments would continue to perform these functions in the sectors they oversee (for example, transport, communications, energy, defence etc.), the Department of Public Enterprises would take overall responsibility for the restructuring of enterprises. Similarly, the potential conflict between Government and regulators was clarified by restating that regulators need to operate within the framework of government policy rather than seeking to influence policy themselves. While these pronouncements will clarify the different roles of government agencies, these relationships will need to be spelt out more clearly in a formal document such as a refined Protocol on Corporate Governance or in the shareholder compacts.
A similar ambiguity in the roles of management and the boards versus that of the shareholder in the restructuring process has complicated this matter. These players may, in some cases, have taken actions during or before the restructuring process which were not necessarily fully aligned to Government’s overall objectives. While both management and the boards have certain operational and fiduciary responsibilities or interests that are distinct from those of the state, in the absence of an accepted framework for corporate governance, it remains difficult to address these questions.(3) The experience with restructuring so far, particularly some of the problems with the Sun Air, Aventura and Alexkor deals, also suggests that the state, as the major shareholder, needs to play a more active role in the process.
Underlying the difficulties associated with these differing roles is the lack of agreement on a framework for corporate governance. Unfortunately, as long as the role of the state remains ambiguous, different stakeholders will exploit this for their particular ends. A framework for corporate governance (4) was finalised in 1997, and most major SOEs have indicated that they support this framework, but Government has only recently taken action to ensure compliance. More recently, the Public Finance Management Act, No. 1 of 1999 (PFMA) provided a clearer statement of fiduciary responsibility and accountability, which, if complemented by a revised protocol on corporate governance, should address these concerns.
In the ensuing sections, this chapter will highlight the main areas where the 1997 Protocol can be revised to bring it into line with the PFMA and international best practice. The shareholder compacts discussed below, coupled with a refined protocol on corporate governance should assure Government that its continuing interests in SOEs are better managed. It will also reassure investors, boards, management and the workforce because Government’s intentions regarding the SOE will be spelt out in detail. The proposed shareholder compacts and a refined protocol should also assist the management and boards of SOEs in performing their duties with the confidence that their roles and responsibilities, and those of the state, are more clearly defined.
Refining the protocol on corporate governance
The importance of corporate governance lies in its contribution to both business prosperity and accountability. The latter has been the subject of much public debate over the past few years in many countries, including South Africa.(5)
This emphasis on accountability has tended to obscure the board's responsibility for enhancing the prosperity of the business. People, teamwork, leadership, enterprise, experience and skills are what really produce prosperity and there is no single formula to weld these together. Rules and regulations about structure will not necessarily deliver success. Accountability, by contrast, does require appropriate rules and regulations, of which disclosure is the most important element.(6)
In the discussion below, various elements of the 1997 Protocol on Corporate Governance are discussed and compared with international best practice. It shows where the 1997 Protocol conforms to international best practice, and where it may need refinement. Since the 1997 Protocol has received Cabinet endorsement, there is no intention to update it at this stage. The policy framework will, however, identify areas where the 1997 Protocol can be improved to meet international best practice, to facilitate a future revision. Where possible, the suggested revisions will be carried through into the shareholder compacts (discussed below) and then used by the Department of Public Enterprises in their day-to-day management of specific SOEs.
Appointment of the Board
The selection or appointment of the board follows a well-planned, formal and transparent procedure. This managed and effective process should ensure board appointments that provide a mix of proficiency, with people who are able to add value and bring independent judgement to the decision-making process. Only people of integrity who can bring a blend of knowledge, skills, objectivity, experience and commitment to the board, must be appointed. The board should be led by a capable Chairman who brings out the best in each member. It is crucial to have a proper and credible director selection process for executive and non-executive directors at both holding and subsidiary company level, to avoid the propensity for "cronyism" and "tokenism". Consequently, the composition of the board, its size and the succession programme should be planned with strategic considerations and objectives of the corporation in mind. This also applies to the appointment of the Chairman and the Chief Executive or Managing Director. The term served by all directors must be determined in advance and form part of a comprehensive letter of appointment. Where appropriate, performance contracts should be entered into.(7)
The Protocol suggests a unitary structure, in line with international best practice; this suggests that a unitary board with sufficient and credible non-executive directors would be the preferred option.(8) Although most international sources cite the need for a balance between executive and non-executive directors, private companies seems to have more non-executive than executive directors.(9) The Protocol suggests a balance between executive and non-executive directors, but this may need to be revisited as more non-executive directors would ensure better review of the performance of the board and the organisation.
The Protocol refers to the independence of the non-executive directors from management, but does not address the issue of undue political influence affecting the independence of such directors. It is important to distinguish between the state’s influence as a shareholder and "undue political influence". In line with the above discussion of the impact of restructuring, it is argued that the state can use SOEs to meet some of its objectives, as long as this is accounted for in a transparent manner. This means that the state’s ability as major shareholder to appoint the board, approve key strategic and business plans, and other aspects of performance management cannot be considered inappropriate if done in terms of acceptable and recognisable procedures. Similarly, the state’s objectives to use SOEs to provide basic services can also be considered legitimate if done transparently, through either direct subsidies or visible cross-subsidies. State influence may be considered excessive (or undue), if it seeks to influence the SOE without being publicly accountable, e.g. through hidden cross-subsidies or private agreements to address objectives not clearly defined in the strategic and business plans. In these circumstances, it seems advisable that the boards use their independence to bring such practices to public attention.
The independence of directors, especially in SOEs, is considered a key feature in the international literature, especially since appointment of the board by the State makes this independence even more difficult. Independence is necessary, not just to protect against undue influence (whether this comes from management or the state), but also to ensure proper oversight of enterprise performance. In this regard, best practice indicates that it is better to keep the management, the setting of strategic direction and performance monitoring as discrete processes.
The independence of the board can be bolstered by the appointment of credible, objective and skilled non-executive directors. It may then also be prudent to ensure a majority of non-executive directors.(10) Non-executive directors should be independent of management; they may be directors or managers from the company’s holding company, but have no executive responsibilities in the company.(11) While the current protocol addresses independence adequately, the experience of the next couple of years will indicate whether further provisions may be required, especially to deal with the issues of independence from undue political influence. These issues will however be addressed in SOE-specific shareholder compacts.
International precedent indicates that the director’s remuneration should at least in part be linked to the performance of the SOE and the board.(12) It also suggest that full disclosure of the total of executive and non-executive directors’ earnings should be made in the annual report and that the directors’ remuneration should be balanced between an amount which would lose significance for the director and a level at which the director may lose independence.(13) The Protocol deals adequately with the issues of performance-linked remuneration and disclosure, but there is little evidence that this is actually being implemented, as some annual reports do not contain this information. The issue of partial or even full liability (discussed below) may scare off some non-executive directors of SOE boards unless their remuneration is in line with their responsibilities. International precedent indicates that compensation should accurately reflect the responsibility and risk involved in being an effective director.(14)
The role and involvement of the shareholder in the final determination of the board remuneration need to be clearly defined. While it is general practice that a committee of the board may be tasked with the responsibility for investigating and recommending to the full board the remuneration structures and levels, the shareholder's involvement may be to consider the board's recommendations for approval. The shareholder's involvement is clearly to ensure that a uniform approach and common standards are applied by the enterprises in the determination of remuneration structure and, where appropriate, remuneration levels.(15)
Role of the board
The Protocol is very general as regards the function of the board and the responsibility of the directors. The specific nature of the relationship between legislation, regulation, shareholder interest and the board is not addressed adequately, although it does state that the board (directors) are individually and collectively accountable to the shareholder and must comply with and co-operate fully and at all times with government policy. The Protocol states that the board needs to maintain full and effective control over day-to-day management but does not mention the board’s role in major capital decisions (acquisitions, disposals, etc.) and in appointing senior management. These functions are best performed by the shareholders, but they should be featured in the strategic and business plans of the enterprise, which requires board participation. There remains, therefore, some confusion over the roles and responsibilities of the board in the Protocol. This can be addressed in the shareholder compacts which makes explicit reference to the content of the strategic and business plans to be approved by the shareholder.
International precedent makes a number of suggestions that would help clarify these concerns. The first question that needs to be properly addressed is whether the board acts in a governing or an advisory capacity. If a unitary board structure is adopted (as in the Protocol), then it appears that the role of the board would be a governing or controlling one (sanctioned by the Minister). In fulfilling this role, the Minister would need to communicate with the boards and ensure they understand the nature and extent of authority delegated to them. The Minister should also establish measures of performance for the board. The board should also be provided with written guidance on how legislation, policies, administrative arrangements and conventions affect its decision-making ability.(16)
Notwithstanding the above, the boards would still have "total accountability for all corporate activity", with their roles and functions identified as follows in the international literature.(17)
It must be emphasised that the board members, individually and collectively, have a fiduciary responsibility to the corporation they serve. This responsibility dictates that the board must at all times ensure that the business enterprise is financially viable and properly managed, so as to protect and enhance the interests of the corporation and its shareholders over time.(18) However, during the restructuring phase, the shareholder will play a greater oversight role, especially in monitoring the management of the restructuring process. To this end, the shareholder will be responsible for the final approval of the senior management appointed by the board.
Although the Protocol states the need for annual budgets against which performance can be monitored, this is probably not sufficient. International experience suggests that Government should define the elements of a performance contract and identify more criteria than just budgets for assessing performance of the board. The Protocol states what is expected from the board and the three duties of the directors,(19) but does not clearly indicate how the board’s performance will be assessed. International best practice suggests that boards should have performance agreements in addition to existing legislative and regulative requirements, and it specifically indicates that the board’s performance should be monitored along with that of the organisation.(20) The review of the board’s performance can be conducted by the non-executive directors,(21) and a yardstick for measuring board performance is the availability of written rules and procedures for the board.(22) These could include (but are not restricted to) information on:
Decision-making by boards
The Protocol does not follow international best practice regarding decisionmaking guidelines and how decision-making should be addressed. The role of the shareholder in board decisions is also not clearly indicated. It is therefore suggested that the shareholder compact should include a section dealing specifically with decision-making procedures.
International precedents provide some guidelines. Best practice provides that boards should:(23)
Disclosure and transparency
The Protocol includes some principles concerning disclosure and transparency, but these are not grouped under a particular heading or section. In future revisions of the Protocol, it would be useful to have a specific section dealing with these issues, which would also identify all stakeholders and the information they should have access to. As noted in the section on microeconomic impacts, information asymmetries have caused a significant failure in SOE corporate governance relationships.
International precedent indicates that communication with shareholder(s) should be based on openness, with substance prevailing over form. Some better practices suggest that parts of board meetings be opened to the media and other stakeholders, and that the board should undertake field visits to assess the organisation at first hand. It is also suggested that information should be timely, accurate, regular and comparable, and that disclosure should include:(24)
Standards of behaviour
The Protocol covers this well, adding that a separate code of conduct can be drawn up to guide the behaviour of directors. Compliance testing is a requirement in the Protocol but, as with the disclosure of remuneration, actual practice is questionable. The Protocol could be clearer on what it prescribes in terms of compliance testing, perhaps with reference to third party assessment.
International practice indicates that the board should oversee the development of a formal code of conduct defining the standards of personal behaviour to which individual board members and all employees of the body would subscribe. The code could include the following provisions:(25)
The Protocol is not clear on the issue of liabilities. Given the difficult relationship between the boards and the shareholder (especially Government), issues pertaining to liabilities should be addressed in more detail in the revised protocol and/or the shareholder compact.
As power without accountability is dangerous, some degree of director liability is considered good practice. This should be based on stated roles and undertakings of the shareholder, board and the director. Director liability needs to be regulated and assessed in terms of both internal factors (i.e. financial health, restructuring, etc.), and external factors (specifically legislation and degree of shareholder support or interference).
International best practice suggests that a limited personal liability for directors is advisable, except that directors are held liable without limitation where reckless or fraudulent actions are involved. Where such personal liabilities exist, however, organisations can be expected to take out insurance to cover the liabilities of directors.(26) However, when "directives and controls" by the Minister result in questionable outcomes, Government may be liable as a principal and the SOE would be viewed as an agent.(27)
Financial reporting (including subsidiaries)
Much of the financial reporting requirements will now be governed by the PFMA and any applicable Regulations promulgated in terms thereof. The financial reporting aspects of the Protocol will serve only to supplement these reporting measures to the extent that they are not superseded. Any revised protocol would, however, need to address the relationship between the shareholder (Government), the holding company and the subsidiaries. Government will also have a final say over the appointment of board members to the subsidiary companies.
International practice supports the notion that there should be total independence of the audit process and that directors are ultimately liable for the integrity of the audit. It indicates that directors should describe in their financial statements the internal control procedures and measures that were introduced.(28) There is little mention of subsidiaries in the international literature, except for a suggestion that, in the case of subsidiary companies or divisions not reporting to the shareholder, they may "effectively be removed from political scrutiny and accountability". It would thus appear that subsidiaries should be liable for reporting to the shareholder, as is the holding company.(29)
Establishing shareholder compacts
The shareholder compact represents an agreement between Government as the major shareholder and the board of the SOE as regards performance expectations and parameters. It does not replace the strategic, business and other plans required for the effective and efficient management of the enterprise.
Rather, it complements these and, recognising the need for a controlled and managed involvement of the shareholder in its investment, describes the relationship between the signatories. Most of the standard and general principles of contract will therefore govern this relationship. The shareholder compact is based on the Protocol, which is time independent, as well as on the strategic, business and other plans of the enterprise, which are time dependent.
Shareholder compacts are being developed with the major SOEs. While the Department of Public Enterprises is using the 1997 Protocol and the above guidelines, the actual format and content will be the result of a process of negotiation and accommodation between the shareholder and the enterprise.
Although the provisions of the compact do not differ in substance from international best practice in both the public and private sectors, some boards may want to incrementally implement the provisions described below. Given that Government is seeking to improve its relationships with the SOEs within a developing framework of corporate governance, it will therefore accept a compromise around the original compacts. These are likely to be updated in the light of the experience with their implementation over the next couple of years.
The compacts will therefore seek to cover most of the following areas:
Introduction: The shareholder compact will state that it is based on the Protocol for Corporate Governance in the Public Sector (1997) and all its subsequent amendments, and on the strategic plan and the business plan of the SOE. It will include the critical assumptions about the operating environment, economic conditions and political relationships for the period covered by the compact. It will state who the signatories to the contract are and what their respective roles are.
Interpretation: There will be a clear definition of all terms that could be misunderstood or interpreted in different ways in the shareholder compact.
Primary relationship between the signatories: The compact will clearly indicate the role of the SOE Board and Management. This will include responsibility for key activities, e.g. appointment of senior executives, and capital decisions. It will also include requirements on nature and degree of contact between management and shareholder. The SOE’s board mandate from the shareholder will be spelt out. The compact will put forward mechanisms to address violations of autonomy and independence.
Undertakings by Management of SOE: The compact will seek to cover what management undertakes to do or not to do, and the tasks for which management is responsible.
Undertakings by Shareholder: The compact will also spell out the role of the shareholder and what it undertakes to do or not to do. For example, the shareholder will undertake to issue instructions with sufficient warnings and response times. The compact will include a statement of intent by the shareholder on how it will fulfil its role as shareholder.
Governance: The statement of governance in the compact will outline the principles and protocols upon which it is based. It will spell out which legislation the SOE will have to comply with (for example, Companies Act, Eskom Act). It will specify requirements for ethical conduct and internal fraud control procedures. It will require a register of conflicts of interests. The compact will outline that directors are committed to duties of care and skill, loyalty and attention.
Corporate goals and objectives: The compact will spell out agreed weight allocations and/or priorities to goals and objectives contained in business and strategic plans (inclusive of main subsidiaries).
Key performance indicators: The compact will define agreed weighted performance indicators (e.g. financials before internal process efficiencies etc.)
Extraordinary reporting: The compact will spell out when extraordinary reporting is required and to whom, by whom, on what, and how.
Decision-making: The compact will contain clear statements on how decisionmaking is to take place at board level (e.g. voting or consensus seeking). It will also outline the role of the shareholder in decision-making.
Policies: The compact will define the role of policy-making departments as against the SOE and the shareholding department. It will include details on policies and legislative requirements that the SOE is obliged to implement, for example, employment equity and procurement policies. It will also outline the planned development of any other/additional policy frameworks, for example, strategic sourcing, share-option schemes, outsourcing, alternative employment models and concessioning.
Obligations to deliver service: The compact will include an undertaking by the SOE to deliver specified critical services, notwithstanding any restructuring policy/arrangements (until there is official notification that the SOE is relieved of those responsibilities). It will also state who can make changes to the service delivery obligations.
Liabilities: The compact will include agreements on the liabilities of management as against those of the shareholder, specifying when management liability falls away. It will also outline the liabilities of executive and non-executive directors. It will spell out insurance and indemnity clauses and arrangements. It will also specify areas where conduct can affect liability.
Penalties and rewards: The compact will define the penalties for non-achievement of agreed objectives (for example, redeployment). Similarly, it will define the rewards and/or bonuses for meeting or exceeding targets. It will also specify the process for confirming rewards and penalties, including reporting procedures, queries, defence submissions, third party assessments, etc.
Third party assessment: The compact will spell out the involvement of third party assessment in the assessment of performance results. It will define who will be responsible for the assessment of non-compliance with agreed roles, responsibilities and undertakings. It will outline how performance expectations can be adjusted flowing from third party assessment.
Notices: The compact will specify the format for notices and that they must be in writing. It will also specify when a notice will be deemed to have been received, depending on whether it is delivered by hand, posted, in the form of a telegram, faxed or e-mailed. It will also define when notices shall be regarded as adequate communication.
Whole agreement: The compact will specify the period it covers. It will also specify the extent of this agreement relative to others, and that the undertakings and annexures to the agreement will be declared active when signed.
Variations: The compact will specify that no variations shall be of any force unless these are in writing and signed by both parties. It will also specify the process for introducing variations (notifications, draft submissions, final).
Conflict with memorandum and/or articles of association: The compact will outline the relationship between the shareholders compact and the Memorandum or Articles of Association, and the procedures that should be followed in case of conflict.
Proposed annexures to the shareholder compact: The following documents will form annexures to the shareholder compact:
As should be evident from the above description of the scope of the shareholder compact (as currently being defined by the Department of Public Enterprises), it will cover all the key areas of concern mentioned in the review of the 1997 Protocol. The shareholder compact is understood to be an interim agreement designed to assist Government in managing the restructuring process. As the restructuring proceeds, a revised protocol on Corporate Governance is drawn up and is adopted by the SOEs, the compact will be revised and/or superseded by more formal corporate governance practice. Furthermore, since the compacts will largely define the relationship between specific SOEs and Government, each compact is being tailored to the distinct requirements of each enterprise.
Government therefore envisages a process whereby the shareholder compacts are used as an interim measure to establish better relations of corporate governance between itself and the main SOEs, and that these compacts will fall away once such an improved relationship is in place.
Refining the corporate governance protocol and establishing shareholder compacts
The review of the 1997 Protocol indicates that, while it covers many issues commonly found in other corporate governance frameworks, it will need to be refined in future to be brought into line with international best practice. However, it is still sufficiently sound to be used to establish the foundations for corporate governance over the next few years. The above discussion details the type of revisions that will be required when it is updated. In the interim, however, the IMCC directed the Department to ensure that the largest four SOEs (Eskom, Transnet, Telkom, and Denel) sign off on the 1997 Protocol. They also requested that the relevant shareholder Ministers to conclude shareholder compacts with these SOEs. Since the shareholder compact will primarily serve to develop an enterprise-specific relationship between Government and the SOE, most (if not all) the limitations listed above are expected to be addressed in the shareholder compact.
Ethics and probity in relation to corporate governance
The Protocol endorses the King Report and adopts both the Code of Corporate Practices and Conduct, and the Code of Ethics. The PFMA also aims at disciplined management of the public resources and establishes a culture of financial probity. These documents cover codes of conduct and conflict of interests, especially pecuniary interest and fraud control. In relation to these matters, the literature on best practice specifies that organisations should:
Imperatives of ethics and probity in business(30)
There is an argument which suggests that corporations that are properly managed and controlled by directors with long-term vision and purpose will, in their own enlightened self interest, ensure that they take proper account of these wider objectives. Corporations now rightly attach increasing importance to their corporate reputation for commercial success; this is underscored by increasing scrutiny from the regulators, the press, pressure groups, labour unions, employees and communities in which they operate.
In this regard, most contracts concluded by corporations involve mutual rights and obligations. This, in turn, involves trust and responsible management to ensure that the conduct of the corporation, internally and externally, is based on enterprise and integrity. The fiduciary duties and responsibilities of directors should, at all times, remain paramount. All stakeholders with a link to the corporation should feel confident that their dealings with the corporation are undertaken with honesty, openness and fairness. It is advocated that one of the responsibilities of directors of any business enterprise (whether private, public, family-owned or state-owned) should be to determine the moral and ethical climate of the business. This can take many forms (and is normally documented and widely disseminated in the organisation), but the conduct of the directors in their dealings both within the corporation and outside will set the example for others to follow.
Bribery and corruption (31)
Ethics is an aspirational objective, and should represent the intrinsic cultural values of the society in which the corporation operates, as well as the behaviour expected of the corporation in all its dealings with shareholders and other stakeholders generally. Where a corporation codifies ethical conduct, as it should, such guidelines should be succinct but sufficiently detailed to give a clear direction. Ethical practices and issues are both complex and vexed. No single or universal model can be defined or prescribed, other than to emphasise the significant importance that international institutional investors and other significant interested parties attach to this issue. While difficult to quantify in precise economic terms, the impact of bribery and corruption on countries, communities and business enterprises has been devastating. Given the many and subtle forms that this may take, the Asian Development Bank estimated that losses due to corruption can total more than a country’s foreign debt in lost revenues and additional costs for goods and services
Ultimately, corruption and fraud, in any manifestation, are theft and criminality against the people of South Africa. In the context of continuing poverty and inequality, these practices can deprive people of homes, livelihoods and sustenance, and will not be tolerated.
This concept means various things to various people, but it generally relates to knowing what is right or wrong in the workplace and doing what is right regarding products/services and in relationships with stakeholders. Wallace and Pekel explain that attention to business ethics is critical during times of fundamental change, as now faced by SOEs. In such times, values that were previously taken for granted are strongly questioned, and many are no longer followed.
Consequently, there is no clear moral compass to guide leaders through complex dilemmas about what is wrong. Attention to ethics in the workplace, therefore, sensitises leaders and staff to how they should act, providing them with a strong moral compass in times of crises and confusion. However, attention to business ethics provides numerous other benefits; these are listed later in this document.
Management of business ethics(33)
Managing business ethics holds tremendous benefit for leaders and managers.
However, the field of business ethics has traditionally been the domain of philosophers, academics and social critics. Consequently, much literature about business ethics is not geared toward the practical needs of leaders and managers, the people primarily responsible for ethics in the workplace. This lack of practical information is the outcome of insufficient involvement of leaders and managers in discussion and literature about business ethics. Lack of involvement of leaders and managers in the field of business ethics has spawned considerable confusion and misunderstanding among leaders and managers about business ethics. Consequently, many managers believe business ethics to be irrelevant as business ethics training often avoids the real-life complexities in leading organisations.
Two broad areas of business ethics(34)
There are two areas that business ethics needs to address:
Managerial mischief: this includes "illegal, unethical, or questionable practices of individual managers or organisations, as well as the causes of such behaviours and remedies to eradicate them". A great deal has been written about managerial mischief, leading many to believe that business ethics is merely a matter of preaching the basics of what is right or wrong. More often though, business ethics is dealing with dilemmas that have no clear right or wrong answers.
Moral mazes: this includes the numerous ethical problems that corporations must deal with on a daily basis, such as corruption, bribery, dishonesty, potential conflicts of interest, wrongful use of resources, mismanagement of contracts and agreements, insider trading or financial interest.
Benefits of managing ethics in business and the workplace(35)
Managing ethics in business and the workplace has various benefits. Ethics programmes:
Managing ethics as a programme(36)
Organisations should establish ethics management programmes that can convey corporate values. These programmes often use codes and policies to guide decisions and behaviour, and can include extensive training and evaluating, depending on the organisation. They provide guidance in ethical dilemmas, as they balance competing values and reconcile them.
The following guidelines can be used to establish an ethics programme:
It is necessary to develop guidelines for managing ethics as a programme in the workplace. It must be recognised that the programmes are more process orientated than most management practices. The bottom line of an ethics programme is accomplishing preferred behaviours in the workplace and creating the ability to handle ethical dilemmas so as to prevent these from occurring in the first instance. Organisations are expected to make ethics decisions in groups, make decisions public as appropriate, and integrate ethics management with other management.
Key roles and responsibilities in ethics management(37)
Depending on the size of the organisation, certain roles may prove useful in managing business ethics in the workplace. These can be full-time, or part-time functions assumed by someone already in the organisation. Small organisations certainly will not have the resources to implement each of the following roles using different people in the organisation. However, the following functions point out responsibilities that should be allocated somewhere in the organisation:
Codes of ethics
A credo generally describes the highest values to which the company aspires to operate. It contains the "thou shalt’s". A code of ethics specifies the ethical rules of operation. It’s the "thou shalt not’s". Some business ethicists feel that codes have no value, as too much focus is put on the codes, and these codes are not influential in managing ethics in the workplace. Many ethicists note that developing and continuing dialogue around the code’s values are most important.
However, when managing complex issues, especially in a crisis, having a code is critical.
In the development of code of ethics, large organisations may consider an overall corporate code and then a separate code to guide each programme or department. The following are some guidelines in the development of codes of ethics:
Examples of ethical values might include:
In developing their code of ethics, organisations and corporations must focus on the top ethical values needed in the organisation, which will avoid the most likely potential ethical dilemmas. There are numerous examples of codes of ethics, but organisations should generate their own codes rather than review examples from other organisations.
Codes of conduct
Codes of conduct specify actions in business and in the workplace, as opposed to codes of ethics, which are generally guidelines. Developing codes of conduct for large organisations may entail developing an overall corporate code of conduct, and then a separate code to guide each of the organisation’s programmes or departments.
The following recommendations may assist in the development of codes of conduct:
Principles of Ethical Conduct(38)
The following principles of ethical conduct are recommended for consideration by SOEs, which should ensure their applicability to all employees. It is expected that by adopting such principles, SOEs will ensure that all stakeholders have confidence in the integrity of the institution:
Policies and procedures(39)
The development of policies and procedures should also entail the development of an overall policy manual. The following guidelines may serve in the development and application of policies:
Resolving ethical dilemmas(40)
Perhaps too often, business ethics is portrayed as a matter of resolving conflicts in which one option appears to be the clear choice. However, ethical dilemmas faced by managers are often highly complex, with no clear guidelines in either law or religion. An ethical dilemma exists when one is faced with a choice between alternatives. Organisations should develop and document a procedure for dealing with such ethical dilemmas. Ideally, these dilemmas should be resolved by a group within the organisation, e.g. an ethics committee comprised of top leaders or managers and/or members of the board.
The ethics programme will not work unless all staff members are trained about what it is how it works and their roles in it. The nature of the system may invite suspicion if not handled openly and honestly. In addition, no matter how fair and up-to-date a set of policies is, the legal system will often interpret employee behaviour (rather than written policies) as de facto policy. Therefore, all staff must be aware of and act in full accordance with procedures.
The following guidelines should serve in the development and application of ethical training:
Principles and characteristics of an ethical organisation(42)
The following are principles and characteristics of ethical and integrity organisations:
Integrating ethics and probity into corporate governance
Further to improving the general climate of corporate governance in the SOE environment, Government is committed to ensuring that the management and boards of the SOEs uphold appropriate standards of ethics and probity. Many of the SOEs have already established codes of conduct for their management and boards, and Government will use performance monitoring to ensure adherence to these codes. In ensuring that these standards are adhered to, SOEs will need to demonstrate that an ethics and probity management programme is in place. This programme should include the following measures applicable to boards and management, to be approved and monitored by Government:
Moreover, through reference to international best practice, Government will encourage the SOEs to periodically review and update these ethics and probity management programmes. It will also ensure that those managing the restructuring process are subject to similar ethical standards to those expected of SOEs. They should also be subject to appropriate probity investigations, and any evidence of misconduct will be fully investigated and prosecuted where applicable. Not only will this focus on ethics and probity constrain corruption and rent-seeking behaviour but also, by encouraging adherence to international ethical standards, Government will reassure potential foreign investors that financial and other corporate misbehaviour will not be tolerated. Government’s commitment to ensuring world-class standards of probity will be demonstrated through its emphasis on ensuring that the management of restructuring process will be both transparent and accountable. Investors and stakeholders will be able to monitor the process, and hold Government accountable for deviations from the published process and programme.
HSBC’s Handover Report, October 1999.
Shirley. 1995. Getting bureaucrats out of business: obstacles to state enterprise reform. Megginson, Nash & Van Randenburgh. 1996. The privatisation dividend.
HSBC’s Handover Report, October 1999.
Protocol on Corporate Governance, HSBC, 14/10/1997.
The comparative analysis of corporate governance related to the Protocol on Corporate Governance in the Public Sector (hereafter referred to as "the Protocol") was based on the following sources:
CACG guidelines: Principles of Corporate Governance in the Commonwealth (CACG)
OECD Principles of Corporate Governance (OECD)
Committee on Corporate Governance – Final Report (CCG – UK)
Performance Audit report: Corporate Governance (Audit Office of New South Wales) (NSW)
Perspective on Directors’ Duties – Deloitte & Touche (D&T)
HSBC handover report (HSBC)
Views from various Deloitte & Touche Specialists (Views)
CACG, King Report, CCG-UK, Views.
(D&T, CACG-King report.)
(NSW, CACG,CCG-UK,D&T, OECD, Views.)
(Duty of loyalty, Duty of care and skill, Duty of attention.)
(CCG-UK, CACG, NSW.)
(D&T, CACG, OECD, NSW.)
(NSW, CCG-UK, CACG, OECD, D&T, Views.)
(CCG-UK, OECD, CACG, NSW.)
CACG, the Protocol, King Report, Final Report (CCG – UK).)
(Carter, M. 1999. Complete guide to ethics management: an ethics toolkit for managers. Wallace & Pekel.)
(Carter, M & Thompson, T. 1991. Managing business ethics. Canadian Public Administration.)
(Masden, P & Shafritz, J. 1990. Essentials of business ethics. New York: Penguin.)
(Genfan, H. 1987. Formalizing business ethics. Training and Development Journal; Kissane, D.E. 1990. Managing values: a systematic approach to business ethics. Training and Development Journal.)
(Genfan, Kirrane, Thompson)
(Dean, P.J. 1992. Making codes of ethics "real". Journal of Business Ethics.)
US Executive Order 12731. 1998. Principles of ethical conduct.
Dean, Genfan, Masden & Shafritz, and Strong, K.C. & Meyer, G. 1992. An integrative descriptive model of ethics. Journal of Business Ethics.