The more boards are engaged in measures of ethics and compliance, the more positive an impact on corporate culture, leadership, business decisions, and E&C programs, a new report from LRN finds.
“Leading the Way: How Boards of Directors Can Engage in Ethics and Compliance,” published in July, is the second part of LRN’s annual “Ethics & Compliance Program Effectiveness Report.” The first part, “Meeting the COVID-19 Challenge,” provided a holistic look at how the pandemic affected E&C efforts worldwide.
In Part 2, the research found “the makeup of the board itself, what members prioritize, the oversight they exercise, and the accountability they set for leadership cascades from the C-suite all the way through the grassroots of their companies, impacting business practices and workplace conduct in profound ways,” says Emily Miner, leader of E&C Advisory Services at LRN.
Through conducting online interviews with a global sample of 627 E&C professionals at companies and organizations with at least 1,000 employees, LRN examined the following three measures of board engagement:
- Championship: In a time of crisis, did the board actively support and effectively oversee the E&C program?
- Accountability: Does the board play an active role in holding senior executives or high performers accountable for misconduct?
- Communication: Does the board enable open and direct two-way communication with the E&C function?
The overall results were positive, with 79 percent of respondents saying their board effectively supported their E&C program during the COVID-19 crisis. Another 77 percent said the E&C function can raise issues or concerns directly to the board, and 60 percent reported that, in the past year, their board has taken an active role in addressing misconduct by senior executives.
Effective vs. ineffective boards
Among the key findings, the report showed when boards actively championed the E&C function during the height of the pandemic:
- E&C considerations were nearly three times more likely to have played an important role in the organization’s COVID-19 response than in organizations where the board did not support the E&C program.
- Organizations were more likely to emphasize values over rules and procedures and inspire employees to do the right thing in difficult circumstances.
- Organizations were more likely to perceive their ethical culture as being stronger because of their experiences during the pandemic.
Regarding accountability, the findings highlight that “when boards send a clear signal that their leadership must, without question, behave ethically, those expectations cascade through the organization and translate into action,” the report states.
Additionally, E&C considerations “play a larger role in key business decisions when senior executives know their boards will hold them accountable for their behavior,” according to the report. Specifically, 61 percent of these organizations “substantially modified or abandoned a business initiative in the past year because of consideration of ethics and compliance risk,” compared to 20 percent of organizations with less engaged boards.
“What boards really need to be doing is asking about outcomes: ‘How do people feel about the company? What does our culture look like? What’s changing in the regulatory landscape that might be impacting us?’”
Emily Miner, Leader of E&C Advisory Services, LRN
Executive accountability also positively impacts culture. “Employees in these organizations are also more likely to trust that their leaders consistently make values-based decisions, to raise questions themselves when decisions seem in conflict with company values, and to go to a higher level above their direct boss if needed to raise ethical concerns,” the report states.
In situations where senior leaders swept wrongdoing under the rug with disastrous consequences for the company, stakeholders often ask, “‘What did the board know? What should they have known? What did they do or not do about it?’ So, it’s critical that boards are setting those expectations for leaders and, beyond that, holding them accountable to those expectations,” Miner adds.
Finally, as it applies to the element of communication, LRN’s report found ethical behavior is more likely to be evaluated as a significant factor in key incentive structures—such as performance management, promotion decisions, and bonus awards—when the E&C function has direct access to the board. There must be a level of communication and trust between the board, or a committee of the board, and the E&C function so chief ethics and compliance officers can elevate issues of concern or report red flags, Miner says.
There is a “dampening effect” when the E&C function must go through the CEO first, Miner adds. “Too often, the board doesn’t know what they should know when it comes to decisions that are being made at the top of the organization,” she says.
Board engagement practices
Taking the findings of LRN’s report into consideration, Miner recommends the following best practices for boards:
Get to know the E&C function and ensure it is well-resourced. Does it have what it needs to ensure E&C efforts are effective at guiding ethical conduct and protecting the organization’s reputation?
Ask tough questions about organizational culture. “Too often, the board/E&C relationship is focused on talking about activities: ‘We’ve trained this many people and had this many course completions and got X number of reports from the hotline,’” Miner says. “What boards really need to be doing is asking about outcomes: ‘How do people feel about the company? What does our culture look like? What’s changing in the regulatory landscape that might be impacting us?’”
Set expectations for executive leadership. Connecting the dots between incentive structures and ethical conduct helps signal to senior leaders that behavior matters. For example, some boards require executive leaders report on culture, have a plan for talking about ethical conduct, and link ethical behavior to senior executives’ compensation packages.
When boards are not engaged, headline-grabbing corporate scandals are more likely to result, even in companies that have a robust E&C program, training, certifications, and a reporting hotline, the LRN survey concludes. The findings show none of these elements alone are enough.
“They must be supported by an ethical structure and a level of awareness and accountability on the part of the board to hold the system to account,” Miner says. “So, it really behooves boards to bring a greater level of focus to engagement in what the ethics and compliance of their organization looks like.”