Academic journal article Journal of Accountancy

The Board's Role in Promoting an Ethical Culture: Boards That Prioritize Corporate Culture, Watch for Red Flags, and Set Clear Expectations Will Encourage Ethical Behavior throughout the Company

Academic journal article Journal of Accountancy

The Board's Role in Promoting an Ethical Culture: Boards That Prioritize Corporate Culture, Watch for Red Flags, and Set Clear Expectations Will Encourage Ethical Behavior throughout the Company

Article excerpt

Research over the past 20 years has continued to underscore that integrity drives performance. Corporate culture and tone at the top are considered key drivers of ethical behavior, but boards of directors often devote little time to the topic.

Board members generally recognize their responsibility to oversee ethics and compliance, said Pat Harned, CEO of the Ethics and Compliance Initiative, a U.S. think tank. What they struggle with, she said, "[is] to know what questions to ask and what information to look for. I don't think directors are particularly well-versed in recognizing red flags."

Serving on a board is a big job, Harned said. Business strategy and expansion, risks, and enforcement frequently take priority. Board members are aware of the importance of an ethical corporate culture and that it is driven from the top down, but 87% considered culture and engagement a top challenge, according to a Deloitte survey published in 2015. A separate Deloitte study published in 2016 found that just 28% of executives said they understand their organizational culture and 12% thought their company was driving the "right culture."

The problem often starts right in the boardroom. Research from a 2016 survey by the Rock Center for Corporate Governance at Stanford University and The Miles Group suggested that only 46% of board members strongly believe their board tolerates dissent. The same percentage believes that a few directors have an outsize influence on board decisions.

A 2017 Blue Ribbon Commission of the National Association of Corporate Directors (NACD) suggested that boards can tackle the challenges. What they need to do is become as disciplined in overseeing corporate culture as they are in overseeing risk management, commission members said.

LOOKING FOR RED FLAGS

Many businesses have codes of ethics that employees are supposed to follow and mission statements that promote values such as ethical behavior.

It is important that these statements and codes exist, but what really counts is having the board and senior management know and buy into them, said Christy Pickering, CPA, a sole proprietor in Ocean Springs, Miss., who focuses on tax and litigation support. She has been a member of the board of directors at Hancock Whitney Corp., one of the largest banks in the Southeast, since 2000 and has served on the board's audit, compensation, corporate governance, and executive committees.

"Corporate culture defines why a company exists and what it believes in," Pickering said. "Business strategy and operating methodology may change over the years, but corporate culture should remain constant. Tone at the top means that the board truly believes in the corporate culture and assures that the entire team adheres to the cultural values, starting with the directors and executive officers of the company."

For example, once a year the audit committee of the Hancock Whitney board schedules a meeting with each of the top 10 or so executive officers. These are confidential sessions where executives are encouraged to speak about concerns, problems, and other potential warning signs, she said. The sessions typically last between 30 and 45 minutes. This occurs either during an all-day meeting, or in sessions that are split into two or three dates, depending on availability.

It's important that during the annual executive session, audit committee members ask broad questions. The AICPA Audit Committee Toolkit for Public Companies advises asking questions such as:

* Are you aware of any issues that could cause embarrassment to the company? Have you ever been told anything in confidence or otherwise that would embarrass the company if it were known publicly?

* Are there any items that you have discussed with the CEO, CFO, other officers, or outside counsel of which the audit committee is not already aware?

* Is there any activity in the organization with which you are uncomfortable, consider unusual, or that you believe warrants further investigation? …

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