The Tone From the Top

How Behaviour Trumps Strategy

Ian Muir

• Publisher: Routledge
• Year: 2016
• Topic: Business
• eBook ISBN:
  9781317013808
• Subtopic: Business Ethics
• Index: Business

Many companies have been criticised for weak business ethics, including in some cases breaking the law. Numerous scandals have rocked industries as diverse as banking, insurance, oil, supermarkets, consumer goods, pharmaceuticals and the media. But ethical lapses are not confined to business; few sectors of society can claim the moral high ground. This year, like every other year, new scandals and ethical breaches have hit the news. The Tone from the Top: How Behaviour Trumps Strategy will convince readers that leaders' behaviour and the signals they send are more important than strategy. In an increasingly transparent world, employee engagement is founded on trust - of their boss, their department, of their whole enterprise. Ian sets the scene via 'something's not right' then provides first hand evidence from interviews with the chairmen of a quarter of a trillion pounds of market capitalisation (FTSE200 companies). In offering a model for a much more systematic approach, Ian shows that behaviour and signalling have a much greater influence on business performance and ethics than simply communicating a strategy. This book helps readers understand how boards provide ethical leadership; how boards monitor the tone they are setting; and how non-executive directors can check that their company has a good ethical compass.

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PART I

THE RESEARCH INTO THE TONE FROM THE TOP

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Many companies have been criticised for weaknesses in their business ethics, including in some cases breaking the law.

In 2013, the repercussions of PPI mis-selling, of LIBOR manipulation, of Deep Water Horizon, of the horsemeat scandal and other historic problems continued to plague the companies involved. In 2014, scandals continued as did prosecutions by the regulators, especially in financial services. Company profits in affected organisations were hit, in part due to hundreds of millions of pounds set aside for compensation payments, ‘customer redress’ and mis-selling of inappropriate products.

But the problem of ethical lapses is not confined to business. MPs continue to be viewed with suspicion as a result of their expenses scandal. The National Health Service suffered from the Mid-Staffordshire scandal in which nurses appeared to ignore patient needs. Journalists are tarnished by the phone-hacking scandal that first surfaced at The News of the World. Defence procurement was alleged to be wasteful when scrutinised by the public accounts committee. Formula One motor racing was tarnished by a multi-million-euro settlement offer to avoid prosecution in Germany. There are few sectors of society that can claim the moral high ground.

This year, like every other year, new scandals and ethical breaches have hit the media. Not so long ago, Google and Amazon faced a parliamentary committee investigating their accounting practices which led to alleged very low payments of corporation tax, and Ernst & Young was held to account for advising on such practices. HSBC was fined $2bn for allowing money laundering in Central America. It was alleged that the BBC paid executives excessive compensation for loss of office and misled both internal and external audiences about the situation.

Tesco was fined for selling strawberries at ‘half price’ even though the period at which the strawberries were sold at full price was less than that required by law. Six furniture retailers were investigated for alleged false discounting in which no one really paid the pre-discount prices. Serco was accused of misrepresenting the number of prisoners it transported and its share price fell 14 per cent in a day. The CFO of Zurich Insurance committed suicide and left a note naming the chairman’s management style; he subsequently resigned. Olympus Cameras was to be prosecuted in the UK for false accounting. Poly Implants Protheses, a French company, was accused of selling breast implants made from industrial silicone, a fuel additive and chemicals used in the production of industrial rubber tubing.

We live in a much more transparent world. The implication is that ethical issues are commonplace. As a result, all boards need to think carefully about how they give ethical leadership to their companies.

The objective of this research was to understand how boards provide ethical leadership; how boards monitor the tone that they are setting; and how non-executive directors check that their company has a good ethical compass. The research also sought to identify examples of good practice.

The research and report were completed by Ian Muir, Director at Keeldeep Associates, and sponsored by Ashridge Business School. The research elicited the views of a range of mostly FTSE100 and FTSE250 chairmen – from diverse sectors including energy, engineering, pharmaceuticals, retail, professional services, construction, hospitality, infrastructure development and financial services.

Some interviewees chair more than one company and many are on more than one board. I am grateful to all the contributors for their candid views and advice, based on their experience and learning.

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THE PARTICIPANTS

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The chairmen of the following companies are thanked for their participation in this research. In the case of other organisations, the most senior representative is also thanked for their participation. All were generous with their time and gave many helpful insights. Where individuals are on more than one board, they usually responded with perspectives from all companies. Where there was comment from other organisations, this is mentioned as being from the wider stakeholder group.

Associated British Foods plc

BAE Systems plc

Balfour Beatty plc

Barratt Developments plc

Beazley plc

BG Group plc

Bodycote plc

Capital and Counties Properties plc

Compass Group plc

DS Smith plc

Ecclesiastical Insurance plc

GlaxoSmithKline plc

Greggs plc

Hays plc

Howden Joinery Group plc

ICAP plc

Informa plc

Laird plc

Morrisons plc

National Grid plc

NextiraOne BV

Old Mutual plc

Page Group plc

Schroders plc

Standard Life plc

Tate & Lyle plc

William Hill plc

Wincanton plc

Wolseley plc

Association of British Insurers

Institute for Business Ethics

MWM Consulting

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EXECUTIVE SUMMARY OF THE RESEARCH: BOARDS SHOULD SET A TONE FROM THE TOP

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Chairmen and their boards recognise the importance of the tone from the top. But, some see it as more than just business ethics. For them, ‘tone’ is also about performance expectations. This report, however, focuses on the business ethics element of the tone from the top and describes the findings from the interviews. Appendix 1 contains a seven-step model for managing ethical risk derived from the interviews.

All interviewees acknowledged the vital role of good business ethics. Many had personal examples to discuss in which actions in their companies had fallen below acceptable standards, so all recognised the need for assurance processes and for the board to send the right signals. Moreover, most chairmen feel they are still learning. While most are comfortable with their board’s approach to compliance, there are big differences in the processes chairmen are using for ethical assurance. Also, there is no obvious best practice on how to deliver signals to the organisation about how managers should behave. Only a few of the participants appeared to have a structured holistic framework for addressing the challenge of setting an appropriate ‘tone from the top’.

ETHICAL RISK CANNOT BE ELIMINATED

Ethical risk is like commercial risk. It cannot be fully eliminated. All companies will have some of the following:

• ‘Bad apples’ – people with inappropriate morals

• ‘Foolish or incompetent apples’ – people who unthinkingly do the wrong thing

• ‘Tempted apples’ – people who are in a situation that pressures or tempts them to do the wrong thing

While boards have a choice of how much commercial risk they want to incur, they should try to minimise ethical risk. They can do this by strengthening recruitment and assessment processes to minimise the number of bad apples, training people to reduce the number of foolish apples and building moral backbone to reduce the number of pressured apples. While this report is mainly about the findings from the research, a framework is offered in Appendix 1 to help boards with a more holistic approach to managing their tone from the top.

A GOOD TONE STARTS WITH A GOOD BOARD

Good boards are made by good chairmen. So the starting point is a chairman with strong professional skills and high ethical standards. The chairman then needs to ensure there is a strong board. If executives respect the board, the signals the board gives will have more effect and will have more traction further down the organisation.

STRONG GOVERNANCE IS PART OF TONE FROM THE TOP

Executives need to feel that the board is interested and knowledgeable and is likely to find out what is going on one way or the other. This requires strong processes of governance and reporting, and board members who take the time to walk the business, meet the managers and have an open dialogue between executives and non-executives. Boards should be particularly sensitive to:

• Lack of transparency or a lack of information around critical decisions

• Failure by the executive or non-executives to confront difficult issues

• Adversarial interpersonal relationships or an atmosphere that makes it hard to air concerns

• Over-reliance on process rather than open dialogue

THE TONE MUST BE LED BY THE CEO

The board cannot replace the CEO in setting the tone. The board’s role is to support the CEO. The board can demonstrate the importance of good ethics by devoting time to the topic. The board can help the CEO with difficult decisions. The board can also check that the CEO is using all the levers at his or her disposal both to communicate the importance of good ethics and to assess actual behaviour.

THE LEVERS OF TONE FROM THE TOP

The interviews uncovered a long list of the levers that CEOs and boards are using to help manage the tone from the top:

• Risk assessments: some companies seek to identify situations where bad ethical choices are likely to be most damaging to the company – for example information submitted to a regulator for a utility, or product quality for a branded company

• Recruitment selection processes: companies are finding additional ways of assessing the ethical compass of new recruits and senior appointments, such as taking references from their previous finance executives

• Board sub-committees: boards are setting up sub-committees or renaming sub-committees to signal the board’s commitment to business ethics

• Employee survey processes: companies are designing questions for the employee survey to assess the state of ethics in different parts of their organisations. Some are using these to set individual targets for managers

• Whistleblowing: companies are strengthening their whistleblowing policies, by, for example, putting the telephone number on the back of lavatory doors

• Informal intelligence: non-executives are increasingly looking for opportunities to ‘walk the business’ and meet executives in informal contexts

• Ethical breach reports: some boards are calling for a regular report of ethical breaches, disciplinary consequences, learnings from breaches and communication processes around breaches

• Codes of conduct: companies are using their codes of conduct to help signal their commitment, by, for example, asking all executives to sign the code each year

• Values and training: companies use values and training to reinforce their ethical code and build a stronger moral backbone in the company

• External audits: companies are beginning to use external audits of ethical behaviour and policies to signal commitment and to demonstrate performance

• Incentive and reward processes: companies are reviewing their incentive processes to identify situations where temptations or pressures may cause their people to behave out of character. Claw-back is becoming more common

• Assessment processes: companies are adding moral character to their performance appraisals

• Business relationships: companies are looking carefully at all of their business relationships, particularly where a business partner may have different values.

THERE ARE NO SILVER BULLETS

None of the chairmen interviewed believe that there are simple answers to the challenge of setting the tone from the top. Moreover, with a crowded agenda of compliance and business issues, it may not be appropriate to attempt to add extra items to board meetings on business ethics. Hence, the challenge seems to be about finding levers that help communicate a high tone from the top without crowding out time for dialogue about the business.

KEY MESSAGES FOR EACH STAKEHOLDER GROUP

Chairmen should have a holistic approach and a systematic strategy for business ethics.

Chairmen

• Assemble and develop a first class board; be clear about skill requirements

• Assess your ethical risks – identify where unethical behaviour could do the most damage

• Consider how best to set the ethical tone and send clear signals to the organisation about the standards and behaviours that are expected

• Make the best use of both input measures (what is being done to reduce external risk) and output measures (are employees acting ethically?)

• Check the CEO has processes in place to assure ethical compliance

Senior Independent Directors

• Ask questions about your management and the board’s strategy for setting a good ethical tone

• Encourage the chairman to f...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• List of Figures
• Acknowledgements
• About the Author
• About Ashridge Business School
• Introduction
• Part I The Research into the Tone from the Top
• Part II Case Studies
• Part III On Leadership
• Index