Values? What values?
Corporate values have become a key focus across the Australian and international regulatory landscape. This week our Principal Governance Consultant, David Mahon, sets out why boards should recognise their role as the guardians of corporate values and what frameworks they can use to determine the values appropriate for their organisations.
It’s all about values in corporate governance these days.
Public companies should have values, and if they don’t have any they should get some, preferably ones that the regulators believe will make companies conduct themselves as a good corporate citizen would.
Values and behaviour
Values set culture and culture drives conduct, which is why ASIC, APRA and the ASX have promoted the importance of stating values in their guides for the companies that they regulate.
As a conduct regulator, ASIC considers good corporate values as being a check on conduct risk, i.e.: “the risk of inappropriate, unethical or unlawful behaviour on the part of an organisation’s management or employees which can be caused by deliberate actions or may be inadvertent and caused by inadequacies in an organisation’s practices, frameworks or education programs.” (ASIC, Market Supervision Update Issue 57, 2015)
For companies regulated by APRA, it is the Board’s job to know if what have been set as the company’s values are being lived within the operations of the company and, if they are not, what actions are being taken to correct this situation.
APRA’s standard CPS220, effectively requires that regulated Boards must:
Specify the quality and character of the culture that they seek to attain (typically done in terms of core Purpose, Values and Principles).
Measure the extent to which the actual culture aligns with the ideal.
Develop and implement measures to close any identified gaps between actual and ideal.
Most importantly, Boards are responsible for shaping the organisation’s values and culture – not APRA.
ASX’s 4th edition of their Corporate Governance Principles and Recommendations recommends that listed companies have values and tell investors about them. Recommendation 3.1 requires listed entities articulate and disclose their values. The scope of the Board of listed entities should be broadened to include:
Defining an entity’s purpose;
Approving the statement of values that underpin the entity’s desired culture;
Oversight of how well management has instilled those stated values within the entity; and
Satisfying itself that remuneration policies align with the entity’s stated purpose and values as well as its strategic objectives and risk appetite
In this way, values are viewed as an organisation’s own internal regulator, the benchmark for how employees and directors are expected to behave and the framework within which they make decisions, and the guardians of those values are the Board of directors.
As a member of the 2015 New York Audit Committee Leadership Network put it: “It’s the Board’s responsibility – we are the conscience of the company, we provide an outsider view of whether (the) company is healthy. We have a moral responsibility”.
Values, ethics and principles
So, values are important, especially “good” values. Where does a Board start when deciding what the organisation’s values should be?
There are two angles to consider when setting values, based on the precept that values drive behaviour:
What set of behaviours will enable the entity to achieve its goals and reason for existing (usually set out in its strategic plan)?
What set of behaviours are expected of it by its external stakeholders (set out in legislation, contracts, industry standards, certifications, company marketing and public statements etc)?
Where these two angles diverge the Board has to consider how best to guide decision makers in the actions they should take. One way is to issue prescriptive rules and policies based on predetermined values to which strict adherence and compliance is required, thereby ensuring consistency of approach and overall coherence in how decisions are made.
Another method is to use a framework of ethical principles to guide and structure the decision-making process. In this scenario, principles are the building blocks that support whether or not an action is aligned with a stated value. Ethics provide the underlying ontological reasoning for the objective “good” of a stated value. This framework supports the application of guided personal judgement by capturing and presenting existing precedents within the organisation, which demonstrate how principles have been applied successfully in similar circumstances.
Values and change
Values are long-term propositions, otherwise they have no weight or authority. They have to stand the test of time, but they also need to be tested to ensure that they continue to be relevant to the internal and external circumstances in which an organisation operates. Society changes and businesses adapt so values cannot be immutable, but the speed at which they are changed should reflect the importance of values to an organisation as a source of inspiration and resilience.
Carmichael Corporate Services Pty Limited (CCS), a division of DJ Carmichael Pty Limited, focuses on delivering expertise in corporate compliance, enterprise risk and effective governance to SMEs. CCS provides clients with these essential corporate skills in a bespoke fixed-price service package, “Board Room Solutions”, that can provide assurance and support for growing companies without the overheads of permanent staff.
Principal Consultant – Governance and Company Secretarial
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