Boards of directors set the ultimate tone at the very top. What they say, what they do, and where they spend time cascades from the C-Suite all the way through the grassroots of companies around the world. One of boards’ critical roles is to oversee ethics and compliance and the systems that are meant to drive companies to do the right thing..
In LRN’s recent report, “What’s the Tone at the Very Top? The Role of Boards in Overseeing Corporate Ethics and Compliance,” we found a big disconnect between boards of directors and their ethics and compliance (E&C) oversight responsibilities. Many Chief Ethics and Compliance Officers (CECOs) say that boards tend to give E&C short shrift despite the significant business, legal and reputational risks involved in ignoring it.
Neglecting E&C is tied to many of the corporate scandals that boards seek at all costs to avoid. One of the first questions that comes up when a compliance failure happens is, ‘Where was the board?’”
Case in point: the Weinstein Company’s board failed to act against its founder’s sexual abuse until it absolutely had to, and the company ultimately declared bankruptcy after immense public backlash. And the Weinstein board is hardly an anomaly.
The lack of board E&C oversight is troubling
To explore the state of current board oversight of ethics, we conducted in-depth interviews with 26 present and past CECOs of large companies. We found that boards are woefully unprepared for ethics oversight. Some highlights:
Only about 40% of CECOs reported that their boards have metrics in place for measuring E&C effectiveness.
Only 40% of CECOs say that their boards of directors are willing to hold senior executives accountable for misconduct that happens on their watch.
Nearly half say that their board has not received education and training on their E&C responsibilities.
About 40% say their boards have not done a “deep dive” on compliance failures and scandals, despite recent Department of Justice regulations requiring them to do so.
The dangerous disconnect between boards and their E&C responsibilities comes right from the mouths of CECOs themselves. Here are some actual quotes from our interviewees:
“The board is passive – it doesn’t have a plan or strategy for ethics and compliance. It needs one.”
“The problem is the board doesn’t spend enough time on any ethics and compliance issue. We’re last on the agenda and often there is not time at all.”
“We don’t measure ethical culture, but we should.”
“The board should be asking senior management something – anything – about ethics and compliance. Neither the CEO nor CFO need to report what they have done.”
Board members can face legal and financial jeopardy
Ethics and compliance failures can have huge consequences, since the E&C function is tied directly to the board’s central concerns: value and reputation. Such lapses on the part of boards can and do blow up companies, devastating their reputation and valuation alike. And individual board members may also be in legal and financial jeopardy in the event of E&C failures.
Practical steps to bridge the gap between boards and ethics oversight
Not all the findings in study are bad news, however. High-functioning boards in the companies in our report:
View E&C as foundational to the business
Hold leadership accountable for E&C outcomes
Develop long-term game plans and rigorous metrics for E&C and focus on behavior and outcomes, not activities
Establish strong, direct relationships with CECOs
Devote real time to their ethics and compliance responsibilities
It is important for boards and leaders to create business operations and company cultures in which E&C is “built in” rather than “tacked on.”
Ultimately, the gulf between CECOs and boards can be bridged – and the companies that get it right in our study show the way – but it requires boards to take meaningful steps to acknowledge the very real financial, tactical, and moral benefits of the E&C function. Ethics and compliance need more support and scrutiny from boards if it is to safeguard company reputation and performance.
To read practical recommendations on how to prepare your board for ethics oversight, click here to view our report: “What’s the Tone at the Very Top? The Role of Boards in Overseeing Corporate Ethics and Compliance.”