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Ethical Governance: The Emerging Role of CompanySecretaries as Ethics OfficersJoffy George, ACS and Prof. (Dr.) K.Sasikumar, Head of Department of Commerce,University of Kerala, Kerala.

e-mail :

mastersjoffy@gmail.com

Ethics and Compliance go together in many aspects and in many companies individualsresponsible for the compliance function perform the role of ethics officer. Ongoingcommitment to an ethical code backed by disciplinary procedures and regularmonitoring of adherence to the code can help an organisation to negotiate anincreasingly complex business environment.

IntroductionMany investors have faith in the ability of code of ethics tomeaningfully influence corporate behaviour and preventcorporate mishaps. Code of ethics alone are unable to influencecorporate behaviour and prevent corporate misdemeanours.If code of ethics are supported by everyone in an organisation,from the chairman down, and are continually updated andmonitored, they can set a sound framework for decision-makingand risk management. Just saying ‘don’t lie and cheat’ isn’tgoing to stop someone from doing it – how naïve. To besuccessful, codes of ethics must have the support of everyonein the organisation. As we know, ‘the fish starts stinking fromthe head’. Having the right ethical structure in place fosters aclimate of transparency and a culture in which good decision-making can flourish. But ethical structures do not have theability, or power, to eliminate dishonesty; they will never beable to completely eradicate this part of human nature. Enronhad had a code of ethics which was not followed because thecorporate culture did not support it. It is generally agreedthat, to be effective, an ethical code has to be a living documentsupported by an appropriate organisational culture and valuesystem. Moreover, to be of value, a code must be consulted,updated and debated.A host of factors determine whether a code will work.Individuals ‘sometimes inadvertently flout ethical codesbecause they misunderstand their duties’. A short-termmentality to performance sometimes breeds a culture in whichit is acceptable to make decisions that compromise ethics.

When individuals feel ‘remote’ from a principle in a code,this principle is unlikely to be followed. Many codes requirean individual to ‘avoid conflicts of interest’ but few explainhow this should be done. While codes of ethics will neverstamp out greed, a principles-based code can encouragebusiness to use its ‘ethical muscle’ to make decisions for thelong-term good of the organisation. Ideally, ongoingcommitment to an ethical code, backed by disciplinaryprocedures and regular monitoring of adherence to the code,can help an organisation negotiate an increasingly complexworld.

Business Ethics and Organisational CultureAs far as organisational culture is concerned, instead ofanalysing various definitions of this expression, it makes muchmore sense to describe its essential characteristics. Thus, ‘ithas a guiding role that helps to know which activities suit bestthe firm’s personality, its existence is associated with the ideaof sharing intentions’; it is due to an empirical need to solvemanagerial problems’; and finally ‘it is specific to each firm’.It must be emphasised that ethical values can only have a lifeof their own if we make sure they are shared by the vastmajority of corporate members. In other words, these valuescannot be in the mind of a single executive or a small groupof executives; they must be assumed by the rest of people inthe organisation. From this perspective, corporate governanceappears as a function that can largely help to consolidateorganisational behaviour patterns.

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If the senior management decides to formulate a strategywithout the involvement of middle managers and others, itwill have a difficult time espousing a collegial flow of authorityand influence. Culture is more powerful than anything else inthe organisation. We can go even further saying thatorganisational ethical culture or, more specifically, the ethicalenvironment within the firm created through managementpractices and espoused values, may be the most importantdeterrent to unethical behaviour; or also point out that behavingethically depends on the ability to recognise that ethical issuesexist, to see things from an ethical point of view. This abilityto see and respond ethically may be related rather to attributesof organisational culture than to attributes of individualemployees.All firms have cultures, although it cannot be inferred fromthis that the actions of all firms are ethically correct. Thereare cultures where ethical issues are denied, ignored or removed.Furthermore, trusting, admiring and respecting a leader donot necessarily mean that followers will behave with integrity.The ethics component of organisational culture is composedof a complex interplay of formal and informal systems thatcan support either ethical or unethical behaviour. The formalsystems include leadership, structure, policies, reward systems,orientation and training programmes, and decision-makingprocesses. Informal systems include norms, heroes, rituals,language, myths, sagas and stories.

Corporate Governance and Business EthicsThe complexity of corporate governance means that no onetheory or model of society is likely to be sufficient forunderstanding, evaluating or designing governance structures.In a similar way, it can be said that there is little consensuson what good corporate governance entails. Another aspectto have in mind is that corporate governance is not the panaceafor the resolution of group or individual problems withinthe firm. In this respect, no leadership style can solve aloneall the situations in which a manager might find himself.Emphasis will have to be laid on one aspect or anotherdepending on the specific department or individualconcerned. An essential quality for those who have to developthis function lies in being able to diagnose the specificsituation and knowing which of the possible ways or stylesto deal with it is the best.In short, leadership by corporate governance goes beyondmanagement, since it also includes the concepts ofencouragement, help and service to others with the purpose ofcarrying out the organisational mission through ethicallycorrect work. This must be accompanied by the existence of a

formal corporate ethics programme which should necessarilyincorporate the following elements:

(a) A code of ethics in line with the company’s ethicalexpectations.

(b) Creation of ethical committees.(c) Maintenance of ethics communications systems that

allow employees to report abuses.(d) Appointment of an Ethics Officer.(e) Ethical training and regulation of a disciplinary process

that can correct unethical behaviours.

Codes and Ethical GovernanceThe increased global emphasis on regulation of financialmarkets is supposed to significantly improve the overall qualityof corporate governance. However, regulation by itself is notenough to prevent company collapses. It is impossible toregulate against greed and incompetence. Issues of trust andintegrity are paramount – no amount of regulation can influencethis. Public needs to be confident that regulations are in place,but they did not want regulation to stifle growth. Regulationis unable to prevent company collapses. The greedy part ofhuman nature cannot be eradicated by legislation – butregulation can make it tougher for unethical behaviour toflourish. Impetus for better corporate governance should comefrom within an organisation.A strong preference for a principled, rather than a prescriptive,approach to regulation needs to emerge. Many feel thatprescriptive rules date quickly and foster a culture in whichthe letter, rather than the spirit, of the law is followed. On theother side, for many, regulation is only one part of thecorporate responsibility jigsaw, but one that can always beimproved. Regulators cannot be everywhere and do everything– a better solution is for the whole market to work together.Regulation can’t produce a blueprint for a risk-free world –economic growth has to be tolerant of these risks.

Emergence of Ethics OfficersThe strategic leadership of ethical behavior in business can nolonger be ignored. In any case, we run the risk of convertingmuch of what is related to business ethics into a mere fashionif it really do not have practical value. A large number ofproblems arise in this context that have to do with the creationof the Ethics Officer figure and the role he or she must play inorder to champion business ethical values that can later beassumed by the rest of the organisation.Ethics Officer is someone who makes sure the organisation

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is doing its best to satisfy stakeholders (all those internallyand externally related to the firm, such as employees,shareholders, clients, suppliers, the local community and thesociety as a whole). From this important premise, the figureof the Ethics Officer when he or she carries out his or hertask properly can become the meeting point between thesenior management, in general, and the rest of thecollaborators of the firm, as far as ethical issues are concerned.We are aware of the fact that ethical management issues arenot easily delegated in the same way as production, marketingor finance functions. Nevertheless, the creation of the EthicsOfficer figure is justified once the ethical guidelines havebeen established.

Do you need an Ethics Officer?Ethical governance encompasses, not only teaching people howto be ethical but also teaching ethical people how to make agood decision when it could be difficult. Two decades ago,many businesses did not believe they had a duty beyond theminimum dictates of the law. That just doesn’t work today. Asmall number of wayward employees can sink a company,however massive it is. For companies to survive, they have tolearn to be pro-active in the gray areas of business. That iswhere the tough decisions are made. That is when ethics paysoff.An “Ethics Officer”, is one of a new generation of corporatemanagers who believe that “Business Ethics” need not be anoxymoron. The goal of an ethics officer is not only to insurethat the company operates in a compliance environment butthat all bring a strong, personal sense of values to our everyday experience in the workplace. Many times, employees haveno place to turn when they are under pressure - there were noclear company-wide ethical standards, no ethical hotline, andno ombudsmen to take their concerns.One of the roles of an Ethics Officer is to examine the statedvalues, mission, and goals of an organization and to determinewhether or not the organization’s behavior actually supportsthese statements. A company which claims to behave ethicallymay use an Ethics Officer as a symbol of accountability,showing that it does not just pay lip service, but actually hasan ethics code in force and appoints people to enforce it.Ethics Officers can also be part of the ethical review boardswhich review proposed experiments in the researchenvironment or consider other proposed activities which mayhave ethical implications. The Ethics Officer may also beempowered to undertake investigations into specific employeesor activities to confirm that they conform with company’sethical guidelines.

Common characteristics of Ethics Officers� They are strong communicators.� They are objective and thoughtful.� They have the ability to establish and maintain credibility

and trust throughout the organisation.� They have the ability to quickly assimilate information

relating to complex issues.� They have the ability to network on all levels of an

organisation.� They have reached personal and professional maturity.� They show rationality in tense interpersonal situations.� They have a deep organisational knowledge.� They have a working knowledge of applicable laws and

regulations.� They have experience and training in ethics and

compliance.� They have integrity and common sense.

Major Ethical IssuesEthical governance is not just a question of process but ofmindset and values among all stakeholders – and this can posethe greatest challenge. One thing is certain: nobody likes to‘lose face’. Nervousness about doing the wrong thing hasheightened. If companies value the formalizing of an ethicalframework, it is surely because it helps them cope with anincreasingly complex business environment due to openingmarkets, falling trade barriers, and intensified competition.The threat of legal penalties exists, but that is not the mainmotivation. Upholding the company’s good name andreputation for integrity are important competitive advantages,and that’s the main motivation.Board of Directors shall pay enough attention to the followingethical issues:

� Creating a culture of integrity� Implementing a code of ethics� Assessing level of adherence to code of ethics� Fraud prevention� Tackling actual or suspected fraud� Tackling bribery� Removing conflicts of interest� Ensuring objectivity in financial reporting� Equal treatment of shareholders

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� Different standards and values for different cultures invarious parts of the world.

Despite the obvious fear of being caught up in a damagingscandal, concern over specific incidents of unethical behavioris kept in check. Tackling actual or suspected fraud is cited asthe top concern. Next to that is preventing fraud in the firstplace.

Fruits of a strong ethical cultureA strong ethical culture makes for a common sense ofmanagement direction and clarity on decisions apart from thefollowing:

� Company’s overall reputation� Compliance with laws and regulations� Gain an edge over competitors� Company’s attractiveness as a potential employer� Company’s attractiveness as a potential supplier� Management and staff motivation� Company’s ranking in analyst reports� Business performance� Ability to obtain future investment� Relationships with the investment community� Share price.

Ethical HurdlesThe time and effort involved is the biggest hurdle in developingand improving ethical practices inside any company. Othermajor hurdles or challenges in ethical governance are:

� Short-term costs� Concentration of share ownership� Transparency of ownership structure� Lack of government support� Perceived as low value to the business� Colleagues do not share the same concerns� Company culture� The existing company structure� Convincing the board of its value/importance� Lack of suitable non-executive and/or independent

directors� Balancing the needs of the business with ethical

practice.

Emerging role of Company Secretaries as EthicsOfficersCompany Secretaries should feel responsible for ensuring thateveryone in their company is ‘on the same page’, regardlessof where they sit on the corporate ladder or where in the worldthey are based. It is commonly assumed that the CompanySecretary is the guiding influence when it comes to turningethical codes into practical action within a company. Giventhe obvious potential for unethical behavior wherever majordecisions are involved, the assumption makes sense. However,the role of the Company Secretary is still evolving, and thatmany Company Secretaries crave clarity on the role that theyshould be playing. A clear majority of Company Secretariessee the ethical buck as stopping with the Chief ExecutiveOfficer. Much strategic oversight is also placed in the handsof many other officers, who play a key role in companies.Very often the responsibilities borne by individuals are couchedin the context of a special committee or the board as a whole.Allocation of responsibility for ensuring ethical practice inthe company spreads over the Board, Board level Committees,Chairman, Chief Executive Officer (CEO), CompanySecretary, Chief Financial Officer (CFO), Chief OperatingOfficer (COO) or someone specifically assigned the role ofan Ethics Officer.Here comes the question, Who is steering? CompanySecretaries should be the driver of any number of keymeasures, from helping to establish a code of ethics, to theintegration of ethical values into board and seniormanagement decision-making, and on to providing protectionfor staff who raise ethical concerns. Company Secretary canalso play the role of a mentor, either through formal channelsor informally.Company Secretaries should be directly involved in thefollowing activities in order to promote an ethical culture withintheir company:

� Promoting an ethical culture� Implementing and ensuring ethical practices� Communicating reports on ethical behavior externally� Set a good ethical example� Ensure protection for staff who raise ethical concerns� Support integration of ethical values into board and

senior management decision-making� Help to establish a code of ethics� Support assessment of adherence to code of ethics� Act as an official or informal mentor for colleagues

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� Support the inclusion of ethical performance withinperformance appraisals

� Support the inclusion of ethics as a subject in stafftraining

� Help to establish an ethics hotline or whistle-blowingpolicy

� Act as an official listener for employees’ ethical concernsat work.

ConclusionAbsence of a right Ethics Officer can be cited as a reason forparalyzing scandals in Enron, Worldcom, Tyco, ArthurAndersen and many more. Perhaps if they had a strong EthicsOfficer at the right place, the fate of these companies wouldhave taken a much different turn. Such a position typically iscombined with the role of a Compliance Officer, responsiblefor keeping up with and abiding by the latest laws andregulations on corporate compliance.First and foremost, Ethics Officers are responsible forenforcing their company’s ethical code of conduct, which mostlisted companies already has. Ethics Officer’s primary duty isto educate every employee about the company’s vision andvalues and that he or she is expected to conduct business withother employees, partners, contractors, suppliers, vendors, andcustomers with respect, integrity, open communication andaccess. Enron, a company that faced one of the worst financialscandals in United States history, highlights the point that oneof the most critical roles of an Ethics Officer is not just tomake sure that the company has a code of conduct, but also toensure that the Code is properly communicated and enforced.The level and requirement for ethical governance will varygreatly, depending on the nature of organization, size and typeof industry. But they all lead to one general answer - ethicsofficers should never do it alone. A truly effective ethicsprogram involves the participation of all executives in alldepartments.Ethics and Compliance go together in many aspects and inmany companies individuals responsible for the compliancefunction perform the role of Ethics Officer. In India, as perthe Listing Agreement, Company Secretary performs the roleof Compliance Officer and he or she should be equally equippedto effectively perform the emerging role of Ethics Officertoo. By virtue of his/her position, a Company Secretary cancommunicate often with board members about ethical issuesand concerns. As well, Company Secretary can communicatewith employees regarding ethical concerns, and make himselfor herself readily available and open to address any ethical

concerns. It’s certainly not an easy job. It requires wearingmany hats, including being a friend to concerned employees,a disciplinarian to rule breakers, a mediator within the entirecompany, and a diplomat to all. �References :1. Hartman, L. P. (2002). Perspectives in Business Ethics, 2nd edn, McGrawHill, Boston.

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19. Douglas, P. C., Davidson, R. A. and Schwartz, B. N. (2001)’The effectof organizational culture and ethical orientation on accountants’ ethicaljudgments’, Journal of Business Ethics, 34, 101–121.

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Does the company secretary fit in to the economicefficiency theories?From the above discussion on the point raised by ProfessorsFox and Heller, it is easy to link that the company secretarycan make a difference. Non-pro rata distribution of wealthgenerated by firms to the shareholders resulting from diversionof claims of the company by the managers from rightfulclaimants can definitely be put to check by the presence of acompany secretary in the organisation. A company secretarycan ensure that managers do not divert claims of the companyby refusing to give effect to share purchases by outsiders, orby refusing to accept board directors lawfully elected by suchshareholders, or by issuing shares to insiders against inadequateconsideration and so on. It is the job of the company secretaryto ensure that such malpractices do not occur, and he is thecompliance officer of the company charged with ensuringproper compliance with all legal requirements. These fallwithin the purview of his day to day activities. The companysecretary can therefore be instrumental in effecting pro ratadistribution of residuals generated by a firm and thereby makehis contribution towards the economy. Similarly, the companysecretary may also be instrumental in ensuring that the companyhas a long lasting relation with all its stakeholders and therebyincrease the sustainability of the organisation for greatereconomic benefit.

ConclusionDeveloping an all-proof framework for efficient corporategovernance that ensures complete legal compliance, efficientallocation of resources, optimum level of investment from allstakeholders in a company, long-lasting business relationshipand sustained business and economic growth and which at thesame time ensures that directors and managers remainaccountable to the shareholders is a herculean task. And ifdeveloped, such a corporate governance mechanism would bean ideal one. The reason is simple, quite contrary to the popularbelief, corporate governance does not start and end with merelya set of rules, guidelines and policies to be complied with. Itis much more with much wider implication and good corporategovernance has its positive impact on the economy of the entirenation. It is not just about directors and managers remainingaccountable to shareholders, or even the wider version thattargets the stakeholders as the beneficiaries of good governance.It is rather about treating a company as an economic unit atthe minimum and that what it does, does not merely affect itsemployees, creditors, investors, competitors, customers andthe government, the impact is on the entire economy. Foreconomically developing countries like India, this considerationgains all the more importance and we are compelled to thinkthat the rightly planned corporate governance structure incompanies that puts due emphasis on economic developmentof the country is the demand of the hour. �

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Corporate Governance – An Economic Perspective

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