A practical guide to what boards can do to create a moral climate.
The culture of any organisation, including its moral climate, is built on the micro and macro interactions and processes that start at the board level. This article provides practical suggestions as to what directors can do personally, and as a board, to influence the organisation’s moral climate and, in turn, its culture. Board members’ behaviours and the moral reasoning they use to make decisions directly and indirectly affect what is perceived as the organisation’s priorities. Employees’ collective perceptions determine the moral climate. As well as being the right thing to do, a moral climate can pay.
This article focuses on moral climate, rather than culture, because the board can more directly and immediately influence organisational climate. Both climate and culture address a common phenomenon: “the creation and influence of social contexts in organisations” (Denison, 1996). However, while culture emphasises a deep understanding of underlying assumptions, values and beliefs, climate captures how the values and beliefs become codified into organisational structures, systems and processes that guide collective behaviours. Examining climate is critical because it is the employees’ collective perceptions of the organisational reality that drive the attitudes and behaviours that ultimately influence business performance. Boards and their individual directors influence the moral climate of their organisations through the purpose and values that they set, what they model in their actual behaviours and decision-making, and the resulting systems and processes that they shape and monitor .
Ethics is the challenge of putting organisational principles and values into action. The moral climate is the shared perception of the organisation’s ethical reality. That is, what is perceived to be done vs what is espoused. Climate importantly captures what employees perceive as the organisational reality, because it is this shared perception that shapes behaviour and attitudes, and in turn will shape the culture.
It is important to note that organisational climate research recognises that ‘perception rules’. While rational, ethical decision-making processes are important, they have limitations. Emerging developments in the field of neuroscience, and recent developments in moral/social psychology and behavioural ethics, are challenging our understanding of the ‘rational human.' While we may have choice, social forces easily eclipse values such as personal integrity. The reason is that our need for ‘social belonging’ influences our behaviour. For example, while we might value ‘speaking up’, this may be extremely difficult if we feel that our work colleagues will exclude us if we do so. Similarly, we might espouse a belief in merit-based recruitment but subconsciously interpret merit through the lens of preferring candidates who have characteristics aligned with our own social milieu.
What can boards and directors do to influence moral climate?
Moral climate arises from collective perceptions. What people perceive is actually done, and what is actually rewarded, counts more than what is espoused. While the board itself may not be visible to organisational members at large, the outcomes of their deliberations and decision-making determines policy and organisational priorities. For example, the most significant decision a board makes is its appointment (and retention or otherwise) of the CEO. What characteristics has the board prioritised? The board of Uber found the moral behaviour of their incumbent CEO was untenable and so he was removed. Is succession carefully prioritised or a knee jerk reaction to an external jolt like a Royal Commission? How these events are dealt with by the board often has more impact on the moral climate than the specific outcome itself.
After hiring (and firing) of the CEO, the ongoing relationship between the board and management can have a key impact on the moral climate. For example, what questions are asked and how are they asked? What information is sought (and not sought)? Are people held to account, and if so how and what are the consequences? What is monitored and controlled and to what level of detail? Who will influence and be influenced by the board’s decision-making processes? All these questions and the way they are introduced are embedded in sets of values and contextual norms. Therefore, before we outline the role the board plays in influencing the moral climate it is valuable to consider how our reasoning always has a moral dimension that affects our decision-making.
Engaging with the CEO, other members of the leadership team, and board papers is important for board decision-making. When we make decisions, we may want to believe we operate like an objective judge who carefully evaluates all the facts and arrives at a well-reasoned judgement. In fact, we’re much more like a lawyer who advocates for a particular outcome. This outcome is based on what we personally value. We tend to use reasoning not to discover what is the ‘objective truth’ but to justify – both to ourselves and to others – the conclusion that reflects our values and what we perceive as the context’s norms. This is what we call moral reasoning.
Emotions and moral intuitions are largely fast, sub-conscious responses. Reasoning, which is conscious, operates much more slowly. Before we can use reasoning to make a decision, our emotional or intuitive response generates a preference. This preference, based on our personal values, leads us to process subsequent information with the motivation to reach our desired conclusion. For example, we tend to trust the validity of a board review that affirms that we are an excellent contributor while we mistrust other feedback that tell us we are not as strategic as we thought. Our first response is to discount the negative (even engage moral outrage) and justify what we want to hear. Because this process occurs subconsciously, we maintain the belief that we reasoned objectively and came to the conclusion rationally and honestly when, in fact, we used reason only to construct justifications to satisfy our own values.
Why moral reasoning matters in the boardroom
Moral reasoning affects decision-making in all areas of our lives. Decision-making around the board table affects those who work in the organisation, and a wide range of stakeholders beyond the organisation. Most, if not all, of our decisions have a moral dimension. As an example, following Hayne’s Royal Commission, commentators have suggested that the core moral dimension we should calibrate business decisions against, is ‘fairness’ . Overtly moral decisions are mostly high-stakes decisions. That is, they are especially complex, emotional, and intuitive. These characteristics provide the ideal conditions for moral reasoning to take effect. Incentive pay is one common way moral reasoning enters into business decisions.
Researchers have found , for example, that when boards approve CEO remuneration structures to pay a large portion of remuneration as stock, product safety problems and product recalls tend to become more common. This is not because CEOs consciously choose to create unsafe products and put consumers in harm’s way. Rather, they rationalize risky decisions that raise the price of the company stock in the short-term but may cause long-term reputational damage.
By promoting moral reasoning in the boardroom, we are fostering a moral climate. To help directors we have identified four domains of influence with suggestions for action. These suggestions are neither prescriptive nor exhaustive. Rather, they are prompts to stimulate the board to help create a moral climate.
THE 4 DOMAINS OF BOARD INFLUENCE IN ENSURING MORAL CLIMATE
SETTING the parameters of the organisation. Agreeing the organisation’s vision, purpose and values is core to a Director’s fiduciary duty. These are the standards against which the desired organisational strategy will be assessed. This is the organisation’s DNA.
Questions to ask:
- Do the vision, purpose and values reflect a long-term perspective or just focus on short term results? How are the vision and values reflected from a long-term perspective?
- What is the gap between the organisation’s aspiration, capability and reality? How can the gap be addressed to deliver what we promise?
- Does the board pack begin with a one-page summary of Vision, Mission, Values, Strategy to support decisions being made in the context of the organisation’s reason for being?
- How does the board calibrate its decision-making in terms of these principles? How is this lens on board decisions introduced to animate discussion and debate?
- What practices has the board introduced to ensure that they calibrate decisions against the notion of “fairness”? For example, an empty chair representing a key stakeholder at the board table as a ‘virtual voice’ in decisions making.
- As all board members are individually accountable for the group decision, how proactive is the board in understanding the key risks in the organisation and how actively are the risk appetite and risk parameters included in decision-making?
SHAPING the systems and processes to align with the organisation’s purpose and values. Neuroscientists agree that people ‘act their way into believing rather than thinking their way into acting’ . If we want to change collective behaviours, we must examine and modify the systems and processes that are influencing the ways people act, rather than trying to change the moral character of individuals to ensure good action. The more aligned systems and processes are with the purpose and values, the more the desired behaviours will be reinforced and will establish norms that indicate a moral climate. As individuals align their behaviour with ethical norms, their sense of social belonging is increased, and a moral climate is fostered in this ‘virtuous’ cycle.
For example, if an organisation wants to be ‘values driven’, this may be espoused to both internal and external audiences and illustrates the emphasis placed on doing the right thing. It burnishes the organisation’s reputation and reinforces the sense that a moral climate is a priority. If systems and processes implicitly and explicitly reinforce and reward adhering to organisational values (for example, celebrating employees who demonstrate these values in practice), this in turn helps other employees aspire to behave in ways that align with the firm’s purpose and values.
Questions to ask:
- To what extent are your systems and processes aligned with the vision, purpose and values?
- On what grounds are people remunerated? Does the system recognise behaviours that align with organisational values or just financial outcomes? Is teamwork valued or just technical skills?
- When recruiting, how do the systems and processes embrace and reflect diversity?
- Is there a formal statement of values? How is it distributed, reinforced, and “lived” by the organisation?
- How are values and purpose kept alive in the boardroom and the organisation? (For example, recordings of customer complaints played in the boardroom; good news customer stories screened in elevators; branding that is values-oriented; are moral actions and speaking up rewarded?) • Are employees at all levels trained in new forms of ethical decision-making? How is the new research into ethics reflected in leadership development programs?
MONITORING. It is said that “What gets measured gets done”. Most organisations understand the need for data to assure performance against expectations. What an organisation chooses to measure sends a message. For example, prioritising safety performance metrics sends a message about the value placed on the safety of people. Whether organisations have systems to encourage speaking up when misconduct is observed, will influence the effectiveness of their risk management and the possibility of major scandals and damaging headlines. However, most employees do not speak up when they observe misalignment between what is espoused and what happens in practice. There are two main reasons for not speaking up: Fear. Employees are afraid of facing active and passive retaliation if they speak up. They worry about how their managers will respond or that they are betraying their mates. Most feel that their reputation and career opportunities will deeply suffer if they voice their concerns; and second: Futility. Many employees believe it is useless to speak up. They perceive they have little influence, and those with power do not want to hear; why take the risk if it’s not worth the effort?
Questions to ask:
- How many different channels are available for employees to express their concerns confidentially without fear of retaliation?
- What behaviours and outcomes are you monitoring, and what are you not watching?
- How do you follow up on issues highlighted until they have been resolved? What does resolution look like (cover-ups, careful transparency, regret where appropriate, taking responsibility)?
- What questions could you ask that might uncover what you might be walking past. Note, there are two types of ‘walking past’ - wilful blindness (I choose not to see) and strategic blindness (when I determine if it is worth ‘seeing’) e.g. will it affect my bonus/ team reputation?
- How are you monitoring – are your questions curious and constructively challenging? Or do you ask ‘gotcha’ questions to blame or show off?
- What difference does the board see between micro-testing for assurance, or micro-managing to control?
- Are environmental and social factors that sometimes contribute to behaving unethically introduced at a board level?
- Are you using a community (moral), customer and diversity lens as well as a performance and compliance lens to evaluate your decision-making?
MODELING. Board members are custodians of their roles. What board members say and do around the board table sets an example for those who attend board meetings, such as management and other stakeholders.
Being a board member brings with it significant power. This comes with a responsibility to recognise that others will model their own behaviour and attitudes on what they observe. When employees perceive a moral climate being demonstrated in the boardroom, they are likely to replicate this in their own behaviours. For example, ignoring disrespectful behaviour in the boardroom is likely to translate into an organisational climate where people are not held to account.
Questions to ask:
- How are the values of the organisation exemplified in decision-making and director behaviours?
- How are people held to account? Are directors encouraged to speak-up in the boardroom? When values misalign, how is this called out?
- How are action items in the Minutes responded to and followed through?
- How do you encourage pushback and ‘getting bad news early’?
- Would others perceive you as making ‘reasonable’ demands of management?
- Would you be comfortable for your behaviour and the board’s decision-making to be dissected on the front page of the newspaper?
- How do you want to be remembered by the organisation and the community?
- Do you have a mentor or a board buddy program that can provide you with candid, honest feedback about your behaviour?
- Does the board role model the importance of reflection by reflecting on its own behaviour each board meeting?
- Are all voices heard in the board room, including those not at the table? For example, the black hat, the future, the perspectives of other stakeholders?
- Are you fully ‘present’ at the board meeting?
Attention to Your Moral Climate Pays
While directors are cognizant of their fiduciary duties and the personal liability of breaching them, it is clearly in the interests of directors to do what they can to ensure a moral climate. Research across many disciplines provides evidence that the more a company is perceived as moral, and socially and environmentally responsible, the more successful it is.
The evidence can be divided into 3 categories:
- The value of a good reputation
- The high cost of Illegal conduct
- Efficiency due to employee collaboration
Reputation: Consumers are attracted to more ethical companies and therefore they can charge higher prices and increase their market share. They also have the advantage of attracting talent, especially millennials, and they also better retain talent. Finally, they also attract better press coverage (usually freely given), which gives them better coverage as a whole.
Illegal conduct is costly and research shows that there is a large and immediate drop in share price leading to many years of lower financial performance. Most of this is due to reputational damage and this often extends to the personal reputations of executives and board members.
Ethical companies have shown to have higher employee engagement and levels of discretionary effort that lead to better results and effectiveness. Where there is an alignment of values, there is more collaboration and desirable behaviours are less likely to need to be prescribed. This is because collaborative cultures practice ethics because it rewards their collective effort; that is, ethical sensibility evolves because it helps groups cooperate – and cooperative groups are more effective.
The market recognises that companies that are perceived as being aware of their social and environmental responsibilities are lower risk, in terms of capital and equity, and rewards them accordingly.
Directors and the board as a whole have an important role to play in developing and reinforcing the moral climate in their organisation. This should occur within and from the boardroom, and also through formal governance frameworks. While the board has a formal role in its governance responsibilities (e.g. setting, shaping and monitoring), it also influences the moral climate informally through its activities both inside and outside the boardroom. Importantly, the moral climate reflects individual director and collective role modelling of the board. As the saying goes ‘the fish rots from the head’, the board must take responsibility for setting the moral climate at the head of the organisation.
Sidebar 1 - Why value statements alone don’t work
While the role of the board is to agree the purpose and values of the organisation, this alone is insufficient. The problem is that while almost every company has a values statement, what matters is what happens in practice. Research showed that 80% of the S&P 500 advertise innovation as a core value and 70% advertise integrity. However, the researchers found that advertised values had no significant correlation to financial performance. A follow up study , involving 679 US companies and survey data from more than 400,000 employees, found that companies that lived their values in practice achieved higher productivity, higher profitability, and an increased ability to attract talent compared with those that did not. They also found that when employees found those in power as trustworthy and ethical, firm performance is stronger
Sidebar 2 - Building an unethical culture
A good case study of an unethical organizational culture is the now defunct Enron. Sims and Brinkmann (2003) described Enron’s ethics as “the ultimate contradiction between words and deeds, between a deceiving glossy facade and a rotten structure behind” (p. 243). Enron executives created an organisational culture that valued profits (the bottom line) over ethical behaviour and doing what’s right.
Judith S. MacCormick FAICD, PhD and MBA (USyd and UNSW), Grad Dip Sci (ANU), BA advises leading public, private and NFP organisations across the globe on issues of strategic corporate governance, and board development and effectiveness. Judith is a faculty advisor, senior facilitator, and writer for the Australian Institute of Company Directors.
Dr Hilary Armstrong consults to organisations to ensure that the connection between values, purpose and strategy is lived in all aspects of the organisation. She draws on extensive experience as a senior leader, academic, management consultant and executive coach. She was Head of the Practice at the Ethics Centre, and has published widely on collaborative leadership, organisational coaching and ethical conversations.
MacCormick, J. (2019) Governing Organisational Culture, AICD Director Tools, July 2019. https://aicd.companydirectors.com.au/resources/director-tools/practical-tools-for-directors/governing-organisational-culture
Ethics in the Boardroom: A guide to ethical decision making, AICD and The Ethics Centre, October 2019.
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NUDGE FOR GOOD
Thaler, Richard H. and Sunstein, Cass R. (2008) Nudge: Improving Decisions About Health, Wealth, and Happiness. Yale University Press,
The UK’s Behavioural Insights Team (AKA the Nudge Unit): www.behaviouralinsights.co.uk
Ethical Systems’ Ethics Pays Research Page: http://ethicalsystems.org/content/ethics-pays
Popadak, J., (October 25, 2013). A Corporate Culture Channel: How Increased Shareholder Governance Reduces Firm Value
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