| Effective
Governance in an Ethicless Organization
By
H. Stephen Grace, Jr.
MAY 2005
- Can an organization whose tone at the top is either nonexistent
or far removed from the norm have effective governance? If
it is possible to have effective governance in what might
be called an “ethicless” organization, what does
this say about the factors that are critical to the effectiveness
of an organization's governance process? The answers to these
questions, particularly the latter, are important, because
the focus on governance continues to intensify.
Criminal
trials of senior management of a number of corporations
are under way, investigations of the mutual fund industry
and the insurance industry are in the media spotlight, and
the requirements mandated by the Sarbanes-Oxley Act (SOA)
are at their starting gate.
While
an ethical tone at the top may not be sufficient to ensure
effective governance, many currently assert that it is at
least a necessary condition. Yet, should the answers to
the questions posed here indicate that effective governance
can occur in what would be considered an ethicless organization,
the importance of tone at the top may be overstated, and
the role of a rigorous set of checks and balances understated.
An
Effective Ethicless Organization
The
fact that effective, long-lasting organizations exist that
are generally recognized to be by any measure devoid of
traditional ethical or moral values is well understood.
Examples are criminal organizations of various types, including
drug cartels. So, in the traditional sense, the organizations
have no ethical tone at the top. What, then, drives or underlies
the effectiveness of these organizations? Careful inspection
would indicate that over time they have put in place highly
effective checks and balances. Each individual has well-defined
responsibilities, and the organizations make certain that
each individual understands those responsibilities. The
organizations demand strict accountability. Furthermore,
each individual is expected to have an attitude of service,
and the organization shows little if any tolerance for individuals
with an attitude of entitlement. Backing up the requirement
for accountability are well-understood consequences for
those falling short in discharging their responsibilities.
Even in the absence of an ethical or moral tone at the top,
these organizations survive and often prosper because of
these checks and balances.
Corporate
Governance Consequences
What
does the existence and effective operation of these ethicless
organizations say for corporate and business governance?
These organizations further confirm that the fundamental
requirement for effective governance is a rigorous set of
checks and balances. This—not tone at the top—is
what lies at the core of effective governance processes.
Recent events have, once again, confirmed the inappropriateness
of relying on tone at the top. Quotes such as the following,
all made by high-profile CEOs of companies that subsequently
suffered severe problems and whose stockholders incurred
major losses, indicate how the publicly announced tone at
the top can sharply differ from the ethical and moral values
actually observed within the organization:
- “Boards
should be absolutely certain that the company is run properly
from a fiduciary standpoint in every degree. I am a great
believer in the audit committee having full access to
the auditors in every way, shape, and form.”—former
Sunbeam Chairman Al Dunlap
- “You’ll
see people who in the early days … took their life
savings and trusted this company with their money. And
I have an awesome responsibility to those people to make
sure that they’ve done right.”—former
WorldCom CEO Bernard Ebbers (convicted in March 2005 on
nine counts of fraud)
- “We
are offended by the perception that we would waste the
resources of a company that is a major part of our life
and livelihood, and that we would be happy with directors
who would permit that waste. … So as a CEO, I want
a strong, competent board.”—former Tyco CEO
Dennis Kozlowski
- “It’s
more than just dollars. You’ve got to give back
to the community that supported you.”—Adelphia
founder John Rigas (convicted in February 2005 on 18 counts
of fraud)
- “People
have an obligation to dissent in this company.”—former
Enron CEO Jeffrey Skilling
Actions
speak louder than words, and organizations’ statements
about their tone at the top have little influence on individuals
who decide to either run over or circumvent their organization’s
stated ethical values. On the other hand, checks and balances
stand as an obstacle to those who would attempt to set aside
the organization’s ethical values and principles.
A
Highly Desirable Ingredient
The
fact that effective governance is not only possible but
actually occurs in organizations that basically lack any
ethical foundations has consequences for the proper structuring
of organizations’ governance processes on rigorous
checks and balances, where the individuals involved understand
not only their own responsibilities but also the responsibilities
of the other key participants in the governance process,
and are positioned to ensure that each of the involved parties
properly addresses these defined responsibilities.
Even
if tone at the top isn’t a necessary ingredient of
effective governance process, it’s a highly desirable
ingredient. A sound, ethical tone at the top permeates and
inspires an organization. It must, however, be supported
and enforced by checks and balances that, in times of temptation,
would strengthen those inclined to stray.
H.
Stephen Grace, Jr., PhD, served as chair of Financial
Executives International in 2003/2004. He is president of
Grace & Co. Consultancy, Inc.
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