Responding to the need to create culture of ethics

Thomas Donaldson

MANILA, Philippines—Corporate governance has become a buzzword in today’s business world. With greater connectivity and the rise of social media, investors and consumers are increasingly monitoring—and demanding—better corporate governance.

Wharton School of the University of Pennsylvania professor Thomas Donaldson, an expert on business ethics, visited the Philippines late last year upon the invitation of First Pacific Group of companies. Named the most influential “thought leader” in Ethisphere Magazine’s 2009 ranking of the 100 Most Influential People in Business Ethics and a recipient of Aspen Institute’s Pioneer Award for lifetime achievement.

Donaldson believes that, regardless of the business model, companies operate in society and financial environments where integrity is key to governance. Beyond standard compliance initiatives, he underscores the role of leadership and how all the codes of ethics and compliance mechanisms in the world don’t add up to success from the standpoint of controlling reputation risk. He argues that one can find patterns of companies failing, and society can learn from these patterns.

For him, the challenge is to create a culture—not just have the compliance mechanism. He sees the importance of creating a culture in which people can speak up, stand up and lead the way out of an impending crisis before it’s too late. If somebody stood up to the commonly observed risky practices of US banks before the recent financial crisis, for instance, it wouldn’t have blown up to this magnitude, he says.

Here are key insights from Donaldson during a roundtable discussion:

Q: How can a company, particularly those in Asia, pursue its effort for good corporate governance while it deals with a regulatory environment that sometimes requires it to make compromises, especially on issues of integrity, just to survive?

A: If we have regulators [that] can’t govern, [they become] part of the problem rather than … the solution. This is a situation you find in many places.

In the end, my view is that only concerted industry action can be effective because the key to the solution lie ultimately in transparency, in the alignment of incentives. They lie in effective system of sanctions, punishment, reward and incentives that affect government people. Any single company that tries to change government practices is at a great disadvantage.

Competitive business is important, but there are key moments when businesses need to come together, especially if one is not doing the job. That’s why people like [PLDT chair] Manny [Pangilinan] are so important—leaders that will stand up, and try and organize around change, not just for the government, but with other places as well.

Q: How do you feel about the top companies in Asia being family-owned, their concept of governance being different?

A: Being in a family business can be a strength from the standpoint of values. Most families have an identity connected to values that can pervade the business, in a way that’s very positive. For example, I’ve been in a number of family business congresses and the owners of good-sized family businesses believe that their business actually have higher values, higher ethics than publicly traded companies. They aren’t always on the dime on the quarterly report, unlike the publicly traded companies are. Unfortunately, we don’t have any research that family businesses are better in that sense. And I think there can be a downside as well. The loyalties can be divided… especially when family-owned businesses also begin to issue stock. Then the prerogatives of the family can come in conflict with the prerogatives of the company.

Q: What is the basic framework on which a company can work on to attain a measure of good governance?

A: I don’t believe [there is a] “one size fits all” that works in the area of governance. I think we need to—we in the United States especially—stop thinking of the general motives model as the model for every company.

For me, governance is a process that aims at discipline, identity and direction for a firm as opposed to how we usually think of governance—the board structure. That’s just the means to an end. In the area of governance, we need to think about culture, about the leadership resources of governance, and structure things accordingly. I’d like to see more directors having access to information that’s simply past their job. This is difficult but I think it’s doable.

I would like to see more directors in touch with their managers, employees. One of the things I like about the United States is that boards meet not in fancy resorts off in the mountain; they meet at a place of business; and the board has extra time to talk to managers.

[At] Walmart, for example, board members are identified with certain managers, at least for a period of time, and they set up a relationship. When directors interact with the management of the company, the question is not simply “are we making money,” but also “how are we doing with respect to our identity, our values?”

Q: There are instances when Western companies who are well-behaved in their backyards, abandon their practice of good governance when they do business in Asia or Africa. Are there international institutions that monitor this?

A:  I can agree with you there. This doesn’t only happen in the US or Europe. For example, Singapore is considerably far down the list. Some attribute it to Lee Kuan Yew’s comment at one point that if we’re in Singapore, we have to behave, but when we’re out … It’s not something that just happens in the West.

My own view is that companies that are lucky enough who come from environments that have pretty good records have a very special responsibility of setting the standards (but) the opposite of that often happens. The responsible multinationals like Shell embrace their offshore [operations] as well. Their disclosure packages force them to disclose, so there are constraints for them to misbehave outside their own territory.

Q: How do you cascade corporate values down the line?

A: Some companies undergo training processes, but better companies have people like Manny (Pangilinan) and other leaders. It’s a phenomenon that I call “being there.” Kofi Annan and the other secretary generals [of the United Nations would go to a place called] the Genetic Café where the middle managers stay. They would sit down and drink coffee while they talk. It turns out what you say in the elevator, your exposure at a human level, is incredibly important in terms of setting the tone for value and being able to hear what you need to hear. It’s an old strategy [called] MBWA—management by walking around.