What is ethical governance and how to implement its principles?
· 11 min read
This article is part of our series to spread free & quality sustainability knowledge for all. Compare on Data Hub™ the sustainability performance of the largest corporate firms: BlackRock, Accenture, Unilever, Nestle and Uber.
Have you heard of the Uber scandal a few years back? Due to a data breach in 2016, hackers stole personal information from 25 million customers and drivers in the US. Instead of reporting the hacker, Uber paid them USD 100,000 to avoid bad publicity.
Hackers continued to download more data and collected over 57 million Uber (See sustainability performance) users’ phone numbers! The company decided to let its CEO go and paid USD 148 million to settle claims.
That wouldn’t have happened if Uber had prioritized ethical governance, a set of procedures, processes, cultures, and values that are designed to ensure the implementation of the highest standard of behavior. As a corporation or entity, we’re not just taking into account legal factors, but also what’s morally right.
Ethical governance is an important factor in an organization’s success, as it enhances its reputation, consumer loyalty, and employee retention. In turn, this will lead to happier employees and higher profits, something that any organization aspires to achieve. In this article, we’ll find out how to uphold ethical values and create good corporate governance. Cases of failures in ethical governance will also be presented to give a better view of its importance in conducting business practices.
You may not realize it, but we often face ethical issues in corporate governance, especially when it comes to decision-making. These situations involve navigating in a gray area, where right and wrong become unclear.
For example, pressuring an employee to resign from their job to avoid paying a hefty severance package. It may not be illegal, but it’s unethical and might lead to lower employee satisfaction. That’s why we need to rely on a set of principles to signify its importance in the workplace.
According to the Council of Europe, here are the key values and principles of ethical business conduct.
Fair conduct of elections, representation, and participation
Everyone should have a voice in decision-making, regardless of their status, and decisions are made according to the will of many.
Objectiveness
Rules, structures, and procedures are adapted to the legitimate expectations and needs of everyone.
Efficiency and effectiveness
Results meet agreed objectives, using performance management systems and the best possible use of resources available.
Openness and transparency
All decisions are made according to rules and regulations, and information on these decisions along with implementation and results are available for the community to access.
Rule of law
Rules and regulations are adopted according to procedures provided by law and enforced impartially.
Ethical conduct
There are efforts to prevent and combat corruption, and conflicts of interest are avoided.
Competence and capacity
Motivation to continuously improve performance and procedures are in place to transform skills into capacity and produce better results.
Innovation and openness to change
Continuously seeking new and efficient solutions with a culture that’s favorable to change for better results.
Sustainability and long-term orientation
A broad and long-term perspective on the sustainability of the community and taking into account the needs of future generations into current policies.
Sound financial management
Accurate charges and costs of services, prudent financial management, and risks are properly estimated and managed.
Human rights, cultural diversity, and social cohesion
Human rights are protected and discrimination is combated. Organizations should also strive for diversity and social cohesion and the integration of disadvantaged parties should be promoted.
Accountability
All decision makers take responsibility for their decision and there are effective remedies when maladministrations happen.
When it comes to ethical conduct, we need to create a proper framework to provide a clear understanding of expectations and requirements. Follow these steps to establish ethical governance!
When several parties are involved, they’ll likely have different views on what’s ethical. Remember that we’ll often deal with gray areas in corporate culture, which means expectations should be set to avoid misunderstanding. The code of conduct and ethics policies will ensure we’ll avoid situations where employees make decisions that can damage the company’s reputation or are not following its values.
There might be a need for a separate function that’s involved in decision-making whenever there’s a report on unethical conduct or a department that will ensure all values are implemented accordingly to promote an ethical culture.
Companies may use third-party or internal audits to monitor progress. There also needs to be a sound reporting mechanism that ensures all abnormalities can be detected.
Whistleblowing is an effective way to detect and prevent corruption inside your company, as it discloses wrongdoing and fraud. For people to come forward, we need to take into account their safety. Whistleblowers may be fired, blacklisted, arrested, or assaulted. The system should provide full protection that guarantees whistleblowers are free of retaliation, such as anonymous reporting.
Ethical leadership and recruiting the right senior management is also an important factor in the framework. Ethical leaders should serve as role models for their employees, demonstrating appropriate behaviors and implementing ethics training according to the company’s core values.
Aside from a corporate-level framework, a project-level framework may also be adopted. An example of a proper system is IBM’s AI ethics governance framework that ensures their AI projects don’t have negative ethical consequences (See sustainability performance of IBM).
Its framework is built on four core roles which are the Policy Advisory Committee that oversees the Ethics Board, the AI Ethics Board that serves to review decision-making processes, the AI Ethics Focal Point that mitigates concerns and risks, and the Advocacy Network for grassroots level network.
Ethical practices should cover all aspects of the company’s operations, and here are some examples.
Nowadays, companies collect enormous amounts of data from their customers. It should be an ethical responsibility for businesses to ensure protection for all information given by their customers. One way to do this is by investing in high-quality cybersecurity to prevent leaks.
Environmental sustainability has been the focal point of many companies lately. Companies may reduce their impact by buying carbon credits, using environmentally friendly materials on a voluntary basis, sourcing from local communities, and donating money to nonprofits.
Inequalities have been present in companies for a long time. For example, only 25% of companies have more than 40% women leaders. As an ethical organization, it’s imperative that all decisions made are merit-based and everyone has the same amount of opportunities.
Create a fair and nurturing environment for employees, and make sure that the working conditions and company’s culture are healthy and hazard-free.
illuminem's Data Hub™ track the world's purchasers of biochar and other carbon credits. Companies like Unilever and Nestlé are setting the benchmark for ethical governance by incorporating transparency and accountability into their sustainability and governance frameworks. BlackRock and Accenture are corporations setting the standard for ethical governance in the digital age. These corporations are leading efforts to ensure ethical practices are integrated at all levels of their operations, prioritizing integrity, fairness, and sustainability. Their governance models promote stakeholder engagement, support responsible business practices, and ensure that the companies’ operations align with societal and environmental expectations. By embracing such frameworks, Unilever and Nestlé are not only strengthening their market position but also inspiring other companies to follow suit in promoting ethical governance as a key driver of long-term success.
Adopting ethical corporate governance has plenty of benefits for companies, and failure to do so will lead to a loss of credibility.
One example of failure is Volkswagen and its emissions fiasco in 2015. In a bid to be seen as more environmentally friendly, Volkswagen (See sustainability performance) marketed their cars as low emissions. The German company admitted to cheating emissions tests and giving false advertisements, losing their customers’ trust. The group’s chief executive resigned as a result of the scandal and VW recalled millions of their cars the next year.
Ethical leadership in governance is when a leader demonstrates appropriate behaviors following the key principles and values, both during or outside of working hours. In essence, ethical leaders are role models for their employees in terms of pointing out wrongdoings and upholding what’s right.
The 8 key ethical values in governance are integrity, fairness, leadership, honesty, accountability, teamwork, charity/kindness, and loyalty. These values guarantee to protection of others against the company’s self-interest and serve as a moral compass for leaders and employees.
The ethics governance framework refers to the system of governance that guarantees ethical behaviours, such as the organizational structures, reporting flows, monitoring procedures, and reviewing process. This might involve setting up a separate advisory committee to make unbiased judgment calls.
Corporate governance is the framework or system of how a business operates, while ethics provide the underlying values on which governance should be based to ensure fair and just decision-making. The combination of both will give you an organization that’s trustworthy and successful in the long run.
Ethical governance is an important part of a company, it takes into account both legal and moral aspects in decision-making. Companies should adopt ethical values and create a framework to ensure it’s implemented properly. Examples of ethical practices that companies could do today are ensuring data protection, environmental sustainability in operations, providing equal opportunities, and good labor practices. As demonstrated by several case studies, failure to uphold ethical governance might lead to loss of public trust, consumer loyalty, and profit. The true value of corporate governance may not be immediate, but it will affect companies in the long run.
illuminem's Data Hub™ tracking sustainability performance data of the largest corporate firms: BlackRock, Accenture, Unilever, Nestle and Uber.
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