The leadership literature cited above endorses the benefits of ethical leadership at all levels but all attribute particular importance to those at the very top. This section highlights literature and regulation which consigns ethical responsibility to directors in particular. Schwartz, et al., (2005) argue that directors are directly responsible for ensuring their organisations are ethical because of the nature of their role. They refer to them as “some of the most important fiduciaries in
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society” given that they are responsible for the protection of corporate assets; select and discipline senior management; approve major transactions and help ensure the accuracy of financial reports. Accordingly, they advocate an ethical tone at the top is the solution to corporate governance failure. Schroeder (2002) and Jayne (2007) give importance to directors’ place in the corporate hierarchy, which gives their words and deeds more weight. Others source this ethical responsibility in their legal obligation to act in the best interests of the company (Armstrong & Francis, 2008a; Schwartz et al., 2005).
This responsibility is reinforced by formal ethical exhortations found in corporate governance codes, corporate codes of ethics and directors’ associations’ codes of conduct. Ultimately directors’ ethical obligations have been enshrined in law in several jurisdictions.
Section 406 of the Sarbanes-Oxley Act 2002, which reformed corporate governance standards in the US, requires public corporations to have a code of ethics for senior executives or to state in their annual report that they do not have such a code as well as why they do not. Under Securities and Exchange
Commission (SEC) rules, detailed guidance for the content of the code is provided including: promotion of honest and ethical conduct, full and fair disclosure,
compliance with laws, internal reporting for violations, and accountability for adherence to the code (Barnett & Maniam, 2008).
The US Federal Sentencing Guidelines for Organisations require organisations to promote an organisational culture that encourages ethical conduct and
commitment to compliance with the law (Canary & Jennings, 2008; Schwartz et al., 2005). “Directors have overall responsibility for the ethics and compliance programmes of the organisation. The tone at the top that they set by example and action is central to the overall ethical environment of their firms. This role is reinforced by their legal responsibilities to provide oversight of the financial performance of the firm” (Schwartz et al., 2005, p. 79).
In the UK Directors are responsible for setting the values of the organisation. The Higgs report, states that “[t]he board should set the company’s values and
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standards and ensure that its obligations to its shareholders and others are
understood” (Higgs, 2003, p. 21). The report also outlines the personal attributes that should be possessed by nonexecutive directors: “First and foremost, integrity, probity and high ethical standards are a prerequisite for all directors” (Higgs, 2003, p. 29). In addition to making board expectations explicit, there is also a recognised need for companies to provide information relating to expected behaviour to all employees (Bonn & Fisher, 2005, p. 732).
Section 172 of the Companies Act 2006 (UK) codifies the fiduciary duty of directors to act in good faith in the company’s best interest in order to promote the success of the company. This includes the long term consequence of decisions and the interests of the employees; the relationships with suppliers, customers; and the impact of the decision on the community and environment; the desirability of maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the company.
In Australia, the Australian Stock Exchange Corporate Governance Council (ASXCGC) advises organisations to “clarify the standards of ethical behaviour required of company directors and key executives . . . and encourage the observance of those standards” (ASX Corporate Governance Council, 2010, p. 25). It recommends establishing a code of conduct that identifies practices for directors, the CEO and other key executives necessary to preserve the ethical reputation and integrity of the company.
The Council (2010) identifies eight corporate governance principles. Principle Three requires directors to promote ethical and responsible decision-making and the Australian Standards Association has prepared a series of standards that outline many aspects of governance including directors' duties under the
Commonwealth Corporations’ Act and other statutes. AS 8000-2003 (Australian principles of good governance), states in Appendix B: ‘a board should approve and foster an appropriate corporate culture matched to the organisation’s values and strategies and the underlying values of these principles are: accountability,
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transparency, fairness and balance, honesty, dignity, legal compliance and good will’ (Standards Australia, 2003).
In New Zealand directors are required to act in the best interests of the
organisation under section 131 of the Companies Act 1993 (NZ). Principle One of the Corporate Governance Code (Securities Commission New Zealand, 2004, p. 7) states: ‘Directors should observe and foster high ethical standards’. This Code goes on to recommend: ‘The board of every entity should adopt a written code of ethics for the entity that sets out explicit expectations for ethical decision making and personal behaviour’(Securities Commission New Zealand, 2004, p. 7). The accompanying commentary exhorts the board to communicate the code of ethics to all and that ethical training be provided. It even recommends the establishment of a system for implementing and reviewing the code of ethics. Another point worthy of note from the commentary is the following: ‘Unless directors and boards are committed to high ethical standards and behaviours, any governance structure they have put in place will not be effective’ (Securities Commission New Zealand, 2004, p. 8).
Rob Challinor a partner and director of investment bankers Northington Partners (NZ) with twenty years’ experience as a director, believes that the ethical
behaviour of directors is very influential on the rest of the organisation: I think that with all board behaviour-and indeed that of the company-the tone is set from the top. It starts with the chair and board, then the chief executive. If a chief executive sees behaviour in the boardroom which is lax in certain regards then they could continue that type of decision making down through the organisation” (Jayne, 2007, p. 83).
Despite regulatory rhetoric around directors’ personal ethical standards little attention has been given to this topic in New Zealand. For instance the Registrar of Companies, in its report to the Ministry of Economic Development, cites deficiencies in board composition as a possible cause of recent governance failures in New Zealand (Commerce Committee, 2009). Bell Gully (2009)
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includes the failure of non-executive and shareholders to effectively monitor decisions of the board in the list of poor governance practices contributing to the demise of these New Zealand companies.
The majority of New Zealand-based academic research to date has not ventured to investigate beyond variations in board characteristics (Gilbertson & Brown, 2002; Grantham, 2004; Hossain, Prevost, & Rao, 2001; Ingley & Van Der Walt, 2001, 2003; Mak & Roush, 2000; Prevost, Rao, & Hossain, 2002, 2003; Van Der Walt, Ingley, Shergill, & Townsend, 2006).In fact it was due to frustration with the dominance of agency theory and the testing of variations in board characteristics, and the lack of in depth process studies of governance that led to the Australian and New Zealand Academy of Management commissioning a special issue in 2010 (Smallman et al., 2010). There have been a small number of studies
exploring the inner workings of corporate governance in New Zealand (Erakovic & Overall, 2010; Lockhart, 2006; Lockhart & Taitoko, 2005; Martyn, 2006; Mathias, 2009; Northcott & Smith, 2011; Peebles, 2010).
Furthermore there has been little written about business ethics in general in New Zealand. Alam (1993) surveyed the top 200 organisations in New Zealand to assess the state of ethics in these companies. He found that most New Zealand companies at that time gave a low priority to ethical values. He carried out a similar survey in 1999 and found little evidence that the situation had changed (Alam, 1999). A survey by Milton-Smith (1997) found there was a high degree of moral confusion in business ethics in Australia and New Zealand organisations. Pajo and McGhee (2003) investigated the institutionalisation of business ethics among New Zealand’s top 200 organisations by surveying 100 companies and interviewing five senior managers. The survey results indicated that the majority were actively incorporating ethical values into their day-to-day to operations but very few could point to formal policies and procedures such as codes of ethics, ethics committees, ethics officers or formal ethics training. The authors concluded that informal mechanisms would have little effect without such formal systems in place.
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New Zealand Management Magazine invited four New Zealand directors to discuss what sort of values guide director decision making, what role they play as a compass for both boardroom and corporate behaviour and whether those values outweigh regulation as a determinant for ‘doing the right thing’ (Jayne, 2007). The few directors interviewed were convinced that ethics dominate board activity and how the board behaves impacts right through the company. Tony Gibbs, a director familiar with both the Australian and New Zealand contexts, believes that directors need to have a strong commitment to their personal code of conduct as regulation is only a guide or backstop (Jayne, 2007). Professional director Sandy Maier asserts that regulation is never going to entirely address what at heart is an aspect of human nature (Jayne, 2007). This research provides anecdotal evidence that ethics could be a significant feature of corporate governance and the
effectiveness of laws and rules depends on the character of the directors themselves.
The most recent study by Keeper (2012) examines the regulatory requirements with respect to ethical decision-making and codes of ethics for companies listed on the New Zealand stock exchange. She was surprised to find that in contrast to other jurisdictions New Zealand companies are not required to disclose their code of ethics and that few actually choose to do so. She concludes that NZ companies and regulators do not appear to place a high degree of importance on ethical practices because of the general apathy towards disclosure of codes of ethics. The findings of both Jayne (2007) and Keeper (2012) invite further research into the role of directors’ personal ethics in carrying out their task of corporate governance and also their relative significance in relation to codes of ethics.