by Tony Manwaring
Tomorrow’s Company had the great delight and honour of hosting Sir David Walker providing our first Tomorrow’s Good Governance Forum lecture.
The commitment to annual election of Company Chairmen was perhaps the headline recommendation – for example this coverage from the Daily Telegraph The Times has since reported on anticipated recommendations from the FRC, suggesting that the proposal for annual elections is likely to be carried forwards (together with calling for more diversity in the boardroom) In a wide ranging ‘tour de force’ it was though the comment made by Sir David as part of the discussion with the audience that really struck me – that it was behaviours that were at fault, and not ethics. Tomorrow’s Company strongly agrees that ‘leadership, behaviours and culture’ – the title of one of the workstreams of the Forum – played an absolutely central role: we have set out this argument in our report Tomorrow’s Innovation, Risk and Culture But does it then follow that ethics did not? I ask feeling especially interested, having had an article published in the Guardian saying that, in the right circumstances, there is much to commend the proposal for the Hippocractic Oath for ‘bankers’ being made by a cross-party commission
Little did I expect in so doing that I might be on the other side of the argument from Sir David – heartened perhaps by his comments that he had initially been sceptical of the work of behavioural analysts, I want to make the case for ethics taking centre stage. To summarise the argument that follows: behaviours are outcomes, but expecting people to behave better without understanding the drivers of ‘better’ behaviour is not going to be effective – an understanding of ethics is essential to having some leverage on what goes 'inside and between' people, and how to build the capacity of people to see the need to behave differently. In this context let me also quote from the quite wonderful short paper written by James Featherby – the White Swan Formula – in what is a very ‘Tomorrow’s Company’ comment: “You should remember that a business has no real existence. A company is only a construct of convenience of creative imaginations and legal propositions. In reality there are only human beings, trading with each other, albeit at a distance.”
The reminder that tomorrow’s company is a living, breathing construct of human beings underlines the importance of human behaviour. But it does not tell us how to try to change those behaviours. In making the case that ethics matter – a lot - I am in the fortunate position of being able to share the views of, and learn from, a number of people who are thinking deeply about these issues for a long time. It is also both reassuring and actually not a little inspiring to find that there are powerful voices also making this argument - the Lord Mayor of the City of London in a speech on 30th March 2010 arguing that: "The UK's financial services sector can reposition itself so that ethics and effective corporate governance are at its heart - ensuring that there are workable sanctions to enforce good behaviour. In other words, we need to extend governance beyond its usual meaning, 'giving effective direction' to include its other meaning, 'ensuring fast feedback', too" Defining terms – morality and ethics
So first let’s be clear about our terms – Michael Smith of Caux Initiatives for Business defines morality and ethics as follows: Morality is the adherence to moral principles (or cardinal virtues) in personal and public life, often but certainly not exclusively underpinned by religious belief. Morality involves the behaviour and commitment of the person or the individual. Ethics are similar in referring to an agreed moral code of practice or behaviour but refer to publicly accepted norms at the organisational rather than the individual level. Roger Steare, author of the excellent ethicability, then adds to this with the following ‘academic’ definitions: 1. Ethics is the study of moral philosophy. 2. In current usage, "ethics" tends to be used in professional life; "morals" in our personal life. However, this distinction is also part of the problem. 3. In terms of Mike's proposition, moral values are by definition "virtues", which are mature, internal drivers of decisions and behaviours such as courage, humility and love. In "ethicability", we call this our Principled Conscience. Philosophers call this "virtue ethics" and the sum of all our virtues is what we call "Integrity". A focus on fair outcomes for all is called "teleology", "consequentialism" or "utilitarianism". A focus on absolute principles or "rules" philosophers call "deontology". Our research is consistent with other contemporary psychologists, which strongly suggests that humans use each of these perspectives to make ethical or moral decisions, but that the development of virtue takes time and maturity. Rule compliance is the moral infancy of the child who cannot be trusted (yet) to make judgements based on internal moral virtues, or indeed on a clear understanding of what fairness for all means. 4. In summary, ethics or moral philosophy, is based on 3 perspectives: We obey the Rules. We do what's Fair for all. We act with Integrity. So what does all of this mean for ethics and the financial crisis? Mike comments that is that the behavioural failures of people to take their oversight and regulatory roles seriously enough - and I would add, the failures to challenge decisions on for example complex products or risk profiles on board when people did not understand or felt profoundly uneasy – is “a failure of responsibility” and that this is in itself a moral and ethical issue:
It amounts to a failure of moral responsibility and duty to perform one's role adequately for what one is being paid to do. The way we behave is a moral and ethical issue: moral in that it is a question of personal values; ethical in the sense that there are norms of business behaviour that need to be met and were palpably not. How, for instance, could ratings agencies give AAA to complex financial instruments and derivatives which they themselves probably did not understand?
Roger goes on that ethics fundamentally challenges the “discredited and unfounded world-view” that human beings are rational beings seeking personal self-interest and only constrained by the rule of law. He points out that we would not limit our view of human beings in this way in our personal life, family and friendships, “so why do people believe this is an ethos that can help sustain human beings and communities in business?” Roger adds this following and fascinating insight: I often refer to Jim Collins' research in both "Good to Great" and "How the Mighty Fall". In the first, his research demonstrates that the moral values of personal humility, courage, self-discipline (NOT rules!) and passion (love) are the root values of business greatness. In the second, he demonstrates that the opposite moral vices of ego, fear, greed and apathy are the primary drivers for corporate destruction.
Roger concludes by saying that alongside a "new" politics, we need a "new" business and economic philosophy We have also posted his '2008 Moral DNA' Report . See the evidence provided, particularly in the early exposition of Rule Compliance, Social Conscience and Principled Conscience. See also the data on Occupations. Ethics in the Age of Sustainability: the importance of stewardship Thinking aloud, I wonder if there is a parallel between how we used to think about CSR and how Tomorrow’s Company thinks about business as a ‘force for good’. Central to this is our view of value and value creation, and the link between value and values.
Within the triple context our argument that business success and recognising social and environmental drivers as well as economic imperatives is mutually reinforcing: it is not about doing good or being good, it is about the enlightened self interest that recognises that success is rooted in ‘expanding the space’ of economic activity, beyond the short term and the boundaries of the corporation. So too for ethics, perhaps? We have long argued that key actors and institutions now need to understand their responsibility to the systems of which they are part and on which they depend – and that the failure of for example Ratings Agencies and many others was not simply an ethical failure in the sense already described, but was also a failure of ‘stewardship’: yes, it was unethical in the sense that Michael mentions, and failed to meet norms of business behaviour; but in so doing, this contributed to a dynamic systems failure – ethics in the twenty first century is about understanding the butterfly effect, and not throwing the stone that may lead to the avalanche. But if this is correct, what do we do about it? Peter Lewis calls for Moral Philosophy and Ethical Decision Making to be an essential part of any Board Induction - “Character begets Judgement which determines Behaviours, so it is no good talking about improving behaviour if you don't look at what underpins it”, he argues. There is a jigsaw of techniques and practices that need to be put in place to create a new and reinforcing self reinforcing ‘system’ which encourages key actors to embed an ethical dimension in what they do and how they do it – I am continually struck by Jane Anderson, of Forum Member YSC’s remark that there are many known and evidenced techniques for improving individual and team performance and decision making, but their use stops short of the no-go zone of the Boardroom These techniques and practices - which we called for in our recent report include:
The critical role of the Chairman, as Sir David remarked and we stated in our recent report. So too the relationship between the Chairman and Chief Executive, and the role of the Non-Executive
Boardroom evaluation must play a vital role, and there is a key requirement for this to include an independent element: the difficulty of getting this right however is captured by Tim Copnells wonderful use of the Schroedinger Cat metaphor from Quantum Physics
Techniques for managing the Boardroom Conversation – recognising that the discussing strategy, risk and compliance is not the same. The Forum is looking at this in its early programme of work;
Good governance needs to be celebrated and recognised – hence proposals for awards and other forms of recognition
The question then is - it seems to me - that these are necessary but not sufficient: do we need to go beyond such techniques and practices, important though these are? Do we also need to also explore:
New thinking in leadership and practices in leadership development – exploring how people develop the capability to manage complexity and uncertainty, to see connectivity and understand complex systems, to go beyond leadership based only on the self to understand interactions with others. (In this context there is some fascinating thinking being developed by John Knights at Leadershape, and his model of Transpersonal Leadership)
The impact of coaching and mentoring – people do not arrive on Boards fully formed, but like any promotion they get the job because of being good at their last role, not the new one (In one sense this could go in the first list of techniques and practices, and much depends on the kind of coaching and mentoring, but for many it is the transformational potential that is worth exploring in this context)
Practices for evidencing ‘ethicability’ – currently being ‘road tested’ in the form of the Moral Character Profile, with support from PWC and others, and available for use
Clarity of purpose – the Forum is exploring the case and format of a Board Mandate, which would set out how it creates value, through what business model, relying on which key relationships; describing its character as a business and its appetite for risk Going beyond the Boardroom, do we not also need to explore how best to set the 'systems conditions' to drive/reinforce these new actions and transformed behaviours - for example by:
Developing an assurance framework recognising the impact of the behavioural dimension – and perhaps requiring that such a framework can be evidenced through regulation or legislation. This is clearly a very complex area, but the pros and cons are worth debating.
Active stewardship by 'owners' - Tomorrow's Company has been advocating for stewardship,arising from our programme, Tomorrow's Owners: for example this blog from Founder Director Mark Goyder The recent intervention by Avivia, LINK the fund managers that own about 1.5 per cent of every company quoted on the FTSE All-share index, writing to 800 chairmen, is a very encouraging indicator:
Promoting the City of London as a centre for 'ethical excellence' - evidencing that the encouragement to the cultures and practices set out will provide for competitive advantage in winning new business and renewing the licence to operate for the City
The importance of stewardship in the context of key actors and institutions working in financial services is that there is clear and compelling evidence that individual needs to take account of not only their firm but also their customer/client, their sector and beyond that the broader system of which they are part: who would once have thought that a few bad calls and dodgy deals might end up triggering the most far reaching intervention by the President of the United States and Congress in establishing a new regulatory framework for financial insitutions As the Good Governance Forum considers its future programme of work and what in practice we will look at under the theme of 'leadership, behaviours and culture', it will be fascinating to see what Forum members determine will need to be considered in detail - and what the Forum as a whole agrees it will need to consider in mapping out all the regulatory, behavioural and 'behavioural plus' issues that need to be worked through in order to map the agenda for good corporate governance in the future which is effective and enduring, by being practical whilst also rising to the challenge of being holistic and systemic in the solutions it offers. Postscript: Beliefs and Values vs Ethics I mentioned earlier the wonderful White Swan written by James Featherby. My blog prompted the following, generous, comment which is well worth sharing. In particular James suggests that the focus on ethics comes across as too judgemental and 'moralising' - and that instead we would do better to focus on foundational beliefs and values: 1 Foundational beliefs are the inner core. Foundational beliefs focus on two questions: who am I (basically am I loved and therefore am I safe) and why am I here (is there a bigger story I am part of or is life pointless).
2 Values are the next layer out and are driven by beliefs (eg if I'm loved/safe I can tell the truth, have courage, be communal etc and, if there's a bigger story, I can subjugate self to bigger objectives rather than immediate self gratification, etc).
3 Behaviours are driven by values
Depending on one's perspective, ideas of religion and/or socially required morality play a greater or lesser part in forming and/or guiding these.
In our current climate, my experience is that using the term 'morality' is often unhelpful (even if accurate). It conjures up too quickly notions of judgementalism and therefore tends to foreshorten discussion.
The term 'ethics' likewise in my experience needs to be used with caution. If used as 'unethical' it speaks of 'morality' and suffers as above. If used more positively it can allow the debate to be sidelined into discussions about rules.
I find 'values' a more helpful term. For example, I find 'values' a more useful context in which to locate the lack of courage shown by some directors in not challenging increased risk (one has said to me, for example, that he did not wish to appear non-entrepreneurial), the pride shown by some in the cleverness of their financial models, and the insecurity shown by others in their desire to accumulate.
It's tough to tackle foundational beliefs (I guess unless one is a priest or a physiologist!). I find, however, that a good way to encourage more worthwhile values is to inspire with the big story - i.e by describing the kind of society (or business) that we wish to see.
In order to have 'bite', values need some specificity, and one has to accept that they come with a price. Doing unto others as one would have them do unto oneself may be a good starting point, but it's not specific enough in practice. One of the tricks is not to be so specific as to end up back with a rule book.
As regards price, for example, one might have to pay in terms of short-term popularity, or even long-term financial reward, in order to show personal courage in the boardroom. I do believe that, in the end and on average, good values pay well. But that is very far from always being the case in particular cases. Hence, the big story helps - to make the risk and possible cost worthwhile.Again my sincere thanks to all those who have shared their insights and very considerable understanding of the issues raised in this blog.