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5 Ways to Get the Governance We Want

Despite all the new rules and regulations , the key to good corporate governance remains a strong commitment to ethics. Here, former Chairman and CEO of Office Depot and Autozone, Steve Odland, tells CEOs how to create and maintain a strong ethical culture.

The best-written set of ethics principles will fail if all corporate individuals do not practice the principles. That’s why we must communicate our principles constantly by deeds and behavior throughout the corporation. CEOs should evaluate the ethics programs of their companies on an ongoing basis to ensure their current program is robust enough to head off the new problems of tomorrow.

Financial breakdowns and outright fraud have shaken the trust and confidence in our system. Public concern followed sensationalized stories of misdeeds, and government followed with new laws and regulations on corporations. Over the past decade many “fixes” have been implemented including the New York Stock Exchange and NASDAQ listing standards for public corporations, the Sarbanes-Oxley Act, and Dodd-Frank.

But we must be careful. We need to know when enough is enough – and that too much tampering with the system could drive unintended consequences. Ironically, many of the issues of the past decade resulted from violations of pre-existing rules and laws. So did we really need the latest avalanche of new regulations and rules or would we have been better off with enforcement of the old ones?

We also have to be careful not to criminalize honest mistakes. As long as we employ human beings, there will be mistakes. Mistakes are inherent in risk-taking and risk-taking is vital to competing in world markets. We would harm ourselves greatly if the threat of regulatory, civil, and criminal sanctions became so pervasive that corporations reduced or stopped taking risks. Risks are inherent in overall corporate growth and the U.S. economy is dependent upon that growth. Yet for corporations to grow, innovation is required in new products, scientific breakthroughs, new markets, and foreign economies where the “lay of the land” is far from stable.

The corporate community has been through a difficult ethical period. This same period was accompanied by scandals plaguing other institutions as well, including issues among political leaders, lawyers, journalists and even clergy.

But we also need to be introspective and ask ourselves what we could have done inside companies to make sure we were implementing programs to ensure our people were following our values. Ultimately good corporate governance is driven by the ethical behavior of individuals in the company.

Ethics problems seem more pervasive in today’s corporation than they have been in the past. Perhaps it is due to the secularization of society. Perhaps it is due to the liberalization of pop culture. Perhaps it is due to the pervasiveness of the Internet and social media, which is still the “wild, wild west” of communications where few rules or constraints apply. Perhaps corporations simply mirror society itself. Whatever the reason, there is a glaring need for new approaches.

CEOs need to be sensitive and watchful for generational differences in ethics. According to a study by The Ethics Resource Center, “all younger workers but especially Millenials are a significant area of vulnerability in terms of observed misconduct.” Corporations cannot assume that everyone has the same sense of right and wrong. So what 30 years ago may have been taken for granted in terms of expected behavior, cannot be assumed today.

So what can CEOs do?

  • Every company must have a written code of ethics and CEOs must talk about them constantly; “Tone at the Top” is an absolute requisite and CEOs must ensure that tone reaches all levels of an organization.
  • Best practices today include situational workshops among all associates, role-playing, scenario training, case studies, debate about gray areas, and constant discussion and modeling of behavior.
  • Companies should have an 800-number advice or ombudsman lines to assist employees and managers with ethical issues separate from the anonymous 800-number hotlines for reports of malfeasance.
  • Since most complaints currently are taken to an employee’s direct supervisor, thorough manager training is required on how to deal with them.
  • CEOs should add Chief Ethics Officer positions reporting directly to them. These need to be separate from Chief Compliance Officers. Compliance Officers are charged with finding violations and violators. Ethics Officers should be more proactive in risk assessment, training, counseling, and hopefully head off future issues before they happen. If you were an associate, with whom would you be most comfortable, a cop or an advisor?

CEOs should build ethics requirements into personal objectives for their people. These performance metrics or competencies can include:

  • Good communication of ethics;
  • Personal modeling of ethical behaviors;
  • Keeping commitments;
  • Maintaining accountability among all employees across the business;
  • Visible support for the ethics and compliance programs; and

Performance can be measured periodically with 360-degree surveys, gaining input from peers, subordinates, and senior leaders.

Any company undergoing “change” is especially vulnerable. Mergers and acquisitions add new cultures–and risk. Expansion into other countries adds Foreign Corrupt Practices Act (FCPA) risk and cultural complexity. And even change in organizational structure or IT programs can create process gaps that leave corporations vulnerable. “Change management” programs need to add values-based ethics training in addition to process change training.

Compliance is about rules, ethics are about values. Rules simply cannot be written to address every possible breakdown in behavior, especially when companies are represented by tens of thousands of people, and millions of customer and stakeholder interactions, all in real time. CEOs cannot assume that all employees have the same ethics. Instead, they need to introduce training programs and role-playing to instill ethical values, and ultimately lead to better decision-making and a more ethical culture.

While not perfect, the U.S. has the best corporate governance, financial reporting, and securities markets in the world. These systems work because of the adoption of best practices by public companies within a framework of laws and regulations. This system can be greatly enhanced by further commitment beyond the rules, to values-based governance. Then we will be in the best position to face unexpected challenges, overcome them, and prosper.

About Steve Odland

Steve Odland is the former Chairman & CEO of Office Depot, Inc., and AutoZone. He is the former chairman of the Business Roundtable Corporate Governance Task Force.