Ethical leadership The key to understanding King III

Ethical leadership – The key to understanding King III CIS Corporate Governance Conference Sandton Convention Centre Johannesburg 10 September 2009 Willem A Landman Ethics Institute of South Africa (Ethic. SA) www. ethicsa. org willem@ethicsa. org 1

Introductory remarks – Ethics and King III Principle 1. 1 – Ethical leadership by board Principle 1. 2 – Board and company as responsible corporate citizen Principles 1. 3 – Board and effective ethics management

Ethics vocabulary • Ethics – Values-based conduct – Discretionary decisions grounded in values • Values – Standards/norms for good, right and fair conduct – Examples: respect, integrity, responsibility, accountability, fairness • Compliance – Rule-based conduct (following laws, regulations, rules) – Ethics codified • Ethical dilemma – Values clash • Ethical reasoning – Using values-based reasoning to solve ethical dilemmas 3

Making an ethical decision An “Ethics Quick Test” 1. 2. 3. 4. 5. 6. 7. 8. Is it legal? Do my organisation’s Code of Ethics/Conduct and other policies allow it? Do my professional standards allow it? What would my ethical role model do? How would it look on the front page of tomorrow’s newspaper? How does it make me feel? Would I be comfortable sharing my decision with my closest family? Does it pass the Golden Rule test? 4

Ethics in all human activities Religion Personal relations Animals and natural environment Science Professions — Law, medicine, accountancy, etc ETHICS Art Education Organisations Sport Politics 5

Ethics in all aspects of business • Business ethics – The application of ethical values to organisational behaviour – – – Boardroom strategies and control HR, IT, technical Product development Sales and marketing Accounting practices Relationships with agents, suppliers and customers (stakeholder relations) 6

King III – “Stakeholder triple context approach” to corporate governance QUESTION 1 To whom is the board responsible? All stakeholders Stakeholder (vs shareholder) model of corporate governance QUESTION 2 For what is the board responsible? Triple context performance and reporting • Economic • Social • Natural environment 7

Relationship ethics/governance in King III • “Ethics of governance” – Ethics is the reason for corporate governance and the King reports – Every aspect of corporate governance is grounded in ethical values • • Board responsibilities Risk management Internal audit Sustainability • “Governance of ethics” – A company’s ethics performance needs to be actively governed and managed – By means of a ethics programme 8

Introductory remarks – Ethics and King III Principle 1. 1 – Ethical leadership by board Principle 1. 2 – Board and company as responsible corporate citizen Principles 1. 3 – Board and effective ethics management

• Principle 1. 1: – “The board should provide effective leadership based on an ethical foundation. ”

Ethical leadership • “Ethics of governance” – Corporate governance requires that the company is run ethically through effective ethical leadership • Strategic direction – Board sets tone at the top • Control – Board delegates operational aspects of ethics management • “License to operate” – Company earns approval from all its stakeholders

Ethical leadership • Ethical leaders – – – Set the tone at the top Make ethics explicit Legitimise ethics discourse Are ethical role models Encourage ethical conduct in others Hold others accountable for the ethics of their conduct

“Ethics of governance” — Ethical values (“RAFT”) 1. Responsibility – Board responsibility for company’s assets 2. Accountability – Board able to justify its decisions 3. Fairness – Board considers interests of all stakeholders fairly 4. Transparency – Board discloses information in manner that allows for meaningful analysis of the company’s actions

“Ethics of governance” — Ethical duties of directors/leaders 1. Conscience – Intellectual honesty; avoids conflict of interest; independence of mind 2. Care – Devotes serious attention to affairs of company; acquires all relevant information needed for effective control and direction 3. Competence – Has knowledge and skills; develops competence 4. Commitment – Diligent in performing duties 5. Courage – Courage to take risks associated with directing a successful sustainable enterprise and to act with integrity 14

Introductory remarks – Ethics and King III Principle 1. 1 – Ethical leadership by board Principle 1. 2 – Board and company as responsible corporate citizen Principles 1. 3 – Board and effective ethics management

• Principle 1. 2: – “The board should ensure that the company is and is seen to be a responsible corporate citizen. ”

Responsible corporate citizenship • Company as collective citizen, analogous to natural person • Discharges duties in manner sensitive to triple context – Economic – Social – Natural environment • In South Africa it means that company builds trust by respecting rights – Universally recognised human rights – Constitutional rights

Introductory remarks – Ethics and King III Principle 1. 1 – Ethical leadership by board Principle 1. 2 – Board and company as responsible corporate citizen Principles 1. 3 – Board and effective ethics management

• Principle 1. 3 – “The board should ensure that the company’s ethics is managed effectively. ”

“Governance of ethics” — The ethical challenges • Proactive: Building – Trust – Reputation • Defensive: Preventing – Fraud, corruption, theft – Cartels, insider trading – Conflicts of interest 20

2. 2 Develop ethical standards (code and policies) 2. 1 Assess ethics risks and opportunities 1. Build ethical culture 2. 3 Integrate ethical standards (ethics code) 2. 4 Monitor, report and disclose 21

Ethics in organisations ― A statement • “Ethics is not an optional add-on to ‘normal’ business, nor it is a ‘soft’ issue. All business strategies and operations have an ethical dimension that we cannot escape — as we cannot escape our own shadow. Ethics holds enormous risks for companies, but ― more importantly ― creates reputational and competitive opportunities. ” 22