The ultimate corporate governance dream is to be “proper and prosper”. Corporate governance and ethics play a fundamental role in driving the responsible actions of an organisation and its leaders and employees.
It may be easy to be proper when you prosper, but what about when things get rough? Do ethics and governance take a back seat when business performance is less than ideal? After the likes of Hyflux and Noble Group, the recent saga surrounding the media circulation numbers of SPH Media makes us ponder again.
What can we learn from these events? How can organisations put in place a robust corporate governance structure that works even when business conditions are less than rosy?
Culture of ethical behaviour
What is the similarity among an accountant, a lawyer, an engineer and a doctor? Members of these professions are subject to codes of ethics or conduct. A well-established profession emphasises the importance of ethical principles and values that its members are expected to uphold.
There is a good reason for this. It is not enough to know what is right. The biggest challenge many face in the workplace is doing what is right, even when no one is watching. But is it sufficient that only professionals should act ethically? That is surely not in the public interest. The need for emphasis on ethical conduct should apply to all employees of an organisation.
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Driving ethical behaviour within an organisation requires consistent action and communication throughout every level of the corporate structure. This goes beyond lip service. Are there clear policies or codes of conduct?
Are they sufficiently communicated and emphasised? Do all employees (including senior management) undergo mandatory training on ethical practices and proper conduct? Are there assessments done to evaluate their level of understanding?
Is action consistently taken against misconduct, regardless of seniority? Are employees rewarded for displaying good values and ethical conduct?
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The right approach to KPIs
Key performance indicators (KPIs) are a powerful tool to measure and drive organisational performance and success. However, as with all tools, they need to be used with care. An overemphasis on performance-driven KPIs can create undue pressure and lead to unethical behaviour to meet or exceed targets. It is crucial to strike the right balance. Organisations should always regularly assess the suitability of their KPIs.
KPIs should be well-defined, reasonable, and achievable. It is also critical that KPIs take into consideration factors or attributes that foster a culture that values ethical behaviour.
When recognition is given for doing the right thing, employees would be encouraged to focus on the sustainable growth of the organisation instead of obsessing over short-term goals or incentives.
Cultivate a sound internal control environment
To effectively cultivate a culture of ethical behaviour and implement a well-functioning KPI system, there needs to be proper accountability and a regular monitoring mechanism. A strong internal control environment is necessary to achieve this.
While most organisations would be familiar with the common principles of internal control, such as segregation of duties and review and monitoring, what many organisations can improve on is in integration and communication.
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When organisations take the segregation of duties too far, departments operate in silos and this leads to barriers to information sharing, coordination and achievement of common control objectives. This reduces the organisation’s operational efficiency and may even feed a culture where departments are inclined to report “what you want to hear”.
Through open lines of communication and knowledge sharing, departments can better understand each other’s processes, risks and controls. This can promote collaboration towards achieving the organisation’s internal control objectives.
Have an effective whistleblowing mechanism
Many organisations have a whistleblowing channel of some sort. But how effective are they?
With jobs and reputations at stake, employees may hesitate to blow the whistle if:
• the process is not clear; • they are not confident that their identity will be protected;
• they are concerned that they may be unfairly treated; or
• they are not convinced that any action will be taken.
For employees to take the leap, it would take more than just knowing that the organisation has a whistleblowing policy in place and motherhood statements disclosed in the annual report.
The organisation needs to take concrete steps to demonstrate to the employees that it is serious about whistleblowing. This will help instil confidence on the ground to encourage employees to speak up against wrongdoings.
Some aspects to consider include:
• How often is the whistleblowing policy and process communicated to employees? Is it only during new staff orientation? How about annual or regular townhall sessions?
• Are employees made aware of alternative channels? This includes the Singapore Exchange Regulation (SGX RegCo) Whistleblowing Office for concerns relating to SGX-listed entities.
• Are the personnel designated to manage the whistleblowing channel independent, or, just as important, perceived to be independent?
• Are statistics or a summary of cases and outcomes communicated to employees?
• Is the whistleblower kept updated about the progress of the case?
Tone from the top
There is only one way the above can be done successfully: when leaders walk the talk, consistently.
Often, there is an inherent fear factor in employees to speak up and deliver bad news. It is when leadership demonstrates a clear commitment towards integrity and ethics that honest conversations with employees can take place, and the organisation can optimally identify and work on issues faced.
Conclusion
There is no shortage of cases which demonstrate that without good governance, a strong ethical culture and robust internal controls, organisations run the risk of making poor decisions as a result of inaccurate data, or worse, being exposed to litigation or reputational risk. Balancing performance and ethics — if you are a decision-maker, have you done your part?
Kang Wai Geat is divisional director, professional standards, and Terence Lam is head, professional standards, at the Institute of Singapore Chartered Accountants
