Missing link

Blog

13 February 2018

All over the world, the three pillars of corporate governance are transparency, accountability and integrity. Transparency and accountability are usually properly safeguarded. Governments and (inter)national supervisory authorities have woven a fine network of regulations that require companies to disclose their financial data and account for the management of their business on an annual basis. The rules regarding the liability of directors and supervisory board members have been tightened everywhere. Those who haven’t performed well at a company are at risk of being dragged to court. These are all reactive approaches: obligations followed by sanctions for non-compliance. It is very questionable whether that’s effective enough.

“The area in which we fall short even more at international level, is the third pillar: integrity.”

The area in which we fall short even more at international level, is the third pillar: integrity. The pillar of integrity is often defined by rules about avoiding conflicts of interest. That’s fine in itself, but if you look closely at those rules they are often formal instructions such as ‘brother and sister may not have a seat on the same board’. When it comes to integrity, however, conflicts of interest are not the biggest challenge. It’s much more difficult to give effective instructions that actually and directly influence correct behavior or a proper attitude when choices have to be made where different interests are involved.

To address this issue, many companies have created internal codes of conduct. In principle that’s a good thing, but the realization of what it actually is all about is often lacking amongst those to whom these codes of conduct apply. Sometimes employees aren’t even aware of the existence of that code, let alone that they know its content or adhere to it.

The missing link is the connection between the rule on the one hand and the inner, internalized conviction that the rule is good and promotes what is good for the company and its stakeholders on the other hand. It’s like with the ten commandments. They have been pretty clear for many centuries. Nevertheless, the divorce rate in most Western societies is approaching fifty percent. In many of these cases, there has been no marital loyalty. I don’t judge whether this is good or bad. I only state that commandments in themselves are insufficiently effective. I also note that the one-sided emphasis on promoting the pillars that are the easiest to tackle – transparency and accountability – is a route that has its risks. After all, if integrity is lacking or is insufficiently defined as part of good corporate governance, then the two other pillars are empty shells. Everywhere around us we see examples of this: companies that technically have their affairs in order and even pay (sometimes only a little) tax. However, if you look closely at what those companies do, they actually don’t make a positive contribution to our world.

There are no great and clear-cut solutions for the problem that I’m discussing here. There are possible pathways that can lead to a solution, though. One of them is to make integrity a topic of discussion at the highest level of the company. It is normal (in the Netherlands it’s even compulsory) to verify as a supervisory board member whether the company’s management is ‘in control’. In a similar way, I think that you should explicitly put the company’s integrity on the agenda at least twice a year as a Supervisory Board. On these occasions, poignant questions must be asked and discussed about how integrity is concretely shaped within the company. In those discussions, it doesn’t suffice to conclude that there is a code of conduct or that a whistleblowing scheme exists. You must be able to indicate if these schemes are effective and what proof there is that this is the case. We need to develop instruments that can provide insight into a company’s level of integrity. That goes much further than incorporating business integrity into the system of compliance and risk management. Then all we get is checkmarks in boxes in rows and once we have checked all of the boxes we’ll have the illusion that the company is operating with integrity. Just like we all have the illusion that we respect the ten commandments. And are blind to all the damage around us. So, start looking for the missing link!

This blogpost is also available in Papiamentu. Click here to download a pdf version.

Do you have a question about corporate governance yourself? Please e-mail it to governance@ekvandoorne.com and perhaps your question will be discussed in the next blogpost.