Ethics in Board Decision-Making

A board of directors is often faced with making a decision that has ethical dimensions. This is not a new phenomenon – it’s always been this way.

But in our current environment – one that features intense stakeholder scrutiny of governance practices, heightened expectations around organizational activities, and seemingly limitless opportunities to make a ‘wrong’ decision instead of a ‘right’ one – it’s more important than ever that boards have access to skills and tools that enable them to make visionary, creative and effective ethical decisions.

What is ethics? It’s a field that seeks to answer the practical question What ought we to do? - a question that applies not just to individuals, but to organizations and of course boards. Ethics consists of well-founded standards of right and wrong that prescribe what we ought to do, in terms of rights, obligations, benefits to society, fairness, or virtues.

Decisions with ethical dimensions do not come to the board with a label marked Caution. Ethical Decision Required. It’s up to us, as directors, to take notice that there are ethical implications to a decision that’s before us, and to treat the decision accordingly. Making use of a reliable, repeatable process – a framework for ethical decision-making – gives the board the best chance of making the ‘right’ ethical decision.

Today we’ll explore how board directors might consider their decisions from an ethical perspective.

Ethics in the Boardroom

There are certain types of boardroom issues that frequently involve ethics. I have found that, while some of these may be settled with a one-off decision, many ethical challenges are ongoing and they never completely go away.

• People, relationships and perspectives. Ethics is often involved in matters about the personal abilities, capacities, knowledge, dedication and interests of individual directors or employees. Similarly, ethics can arise when considering relationships, disagreements and friendships. Conflict of interest is a common example of this type of issue. Other examples that come to mind are favoritism, nepotism, and romantic relationships.
• Business practices and strategic decisions. Ethics can arise with respect to how the organization conducts its operations. This type of issue includes workplace culture, customer and supplier practices, stakeholder relationships, and the design of systems, processes, and policies. There are all sorts of examples such as decisions about diversity, discrimination, health and safety, remuneration, and incentives. Strategic decisions often have an ethical dimension such as workforce structuring, tax strategies or investment decisions.
• The organization’s place in society. Ethical issues arising from outside the organization include opportunities - or pressure - to take action on a social issue such as racial inequity, human rights, climate change, or global trade.

Perspectives on Boardroom Ethics

Ethics is multi-dimensional – it can be viewed from different perspectives. Ethics in the Boardroom – A Guide to Decision Making (from the Australian Institute of Company Directors and The Ethics Centre) suggests viewing boardroom ethics from four perspectives: external influences, board culture, interpersonal dynamics, and individual values.

External influences: Organizations are subject to external factors they cannot control, and many of these factors have serious ethical implications. It’s important to identify the ethical dimensions of the environment that the organization operates in. Ask questions such as:  What aspects of our environment are relevant to this decision?  Whose interests should be taken into account, and are their interests aligned or divergent?  How do we want to position the organization - as a leader or a follower?

Board culture: Every board is unique, with a culture and character built on its history and structure. Sometimes that culture does not reflect the organization’s stated values and principles. The board needs to be aware of the impact of their decision on the organization’s culture. Even seemingly mundane matters can convey a message about what is truly valued at the highest levels of the organization. Ask questions such as:  Does our culture support ethical considerations?  Where are the potential ethical blind spots on the board?  How is this decision linked to the organization’s values and principles?

Interpersonal dynamics: Interpersonal relationships on the board have the potential to distort ethical judgement. Board members – in particular the board chair - need to be alive to how power dynamics can silence those with unconventional perspectives, making extra efforts to ensure everyone is heard. Ask questions such as:  How do our board’s group dynamics impact our discussions?  How can we encourage diverse perspectives?  Are we dismissing the opinions of some directors because they are not subject matter experts, while giving others too much weight because they are?

Individual values: Each of us is an ethical actor, drawing on a personal framework of values and principles. And we each bring our own decision-making style to the board. Awareness of our motivations, biases and ethical reasoning can help us understand what we bring to the table when it comes to making decisions.

An Ethical Decision-Making Framework

Sometimes ethics involves absolutes, but the hardest decisions are in a grey zone where values and principles of equal weight compete. In these cases, the least bad option might be the best we can hope for. A decision-making framework can help us walk through the process of identifying that option.

There are several different frameworks out there, easily found with a quick Google search. I came across frameworks designed for physicians, pharmacists and social workers, among others. These frameworks all have a lot in common, although the terminology may be different.

I’ve chosen to highlight a decision-making framework from the Australian Institute of Company Directors and The Ethics Centre, because it’s designed for boards. You can access all the details at Ethics in the Boardroom – A Guide to Decision Making.

There are five steps in the framework - frame, shape, evaluate, refine, act - offering a clear, simple process for addressing the ethical dimensions of a board decision. If applied well, this process should help ensure that boardroom decisions are ethically defensible. That doesn’t mean that all stakeholders will agree with the decision, but at least the organization will have a sound ethical foundation for making it.

Step 1. Frame - Define and understand the nature of the issue.

• What are the facts and how are they linked to the organization’s core values?
• In making this decision, what assumptions are we making about the world?
• Are there any non-negotiables, such as relevant laws or regulations?
• Whose voices should be heard? What are their interests? Are they aligned or divergent?

Step 2. Shape - Develop options that could resolve the issue.

• What kind of issue are we dealing with? Is it just a temptation to do something questionable? Or is it a genuine dilemma where values and principles are incompatible?
• What are the options? This is the most creative and difficult part of the process. Nothing should be off the table. Even options that seem outlandish should be considered. The seeds of a brilliant solution can often be found in an outlandish idea.
• Take into account perspectives that were gained in Step 1, especially from those whose interests might otherwise be overlooked because of their marginal status.

Step 3. Evaluate - Apply values and principles to the options.

• Take two or three of the best options and evaluate them against the organization’s values and principles. A matrix approach is useful for this step – in essence a grid where each value or principle is weighted according to its relative priority, and each option is evaluated against them.
• If needed, evaluate the preferred option against a wider set of ethical considerations such as:  Will it produce the best outcome?  Would it make a good rule for all?  Would we be proud to see it fully disclosed?  Does it show a proper care and regard for others?

Step 4. Refine - Identify and eliminate weaknesses.

• Identify the major areas of weakness of the preferred option.
• Eliminate the identified weakness without damaging the option’s integrity and utility.
• Put the proposal to some final tests. For instance, ask:  How would I feel if this was done to a loved one?  Would the person I admire most in the world do this?

Step 5. Act - Give effect to the decision.

• Implement the decision and monitor the outcome.
• Offer reasons for the decision, even if it’s not challenged.
• Reflect on the decision. What can be learned from the process and applied in the future?

What can a Savvy Director do?

As individual directors, we can choose to tackle boardroom ethics head on, even though discussing these matters can evoke strong reactions about what’s good or bad, right or wrong.

Personal and organizational values are not always aligned. Resolving that misalignment can require us to expose our beliefs, to go beyond intuition, to challenge and be challenged about our personal ethics and how they relate to the board’s need to make a decision. When we get these issues out in the open, it helps the board to broaden the way it thinks about the decision in front of it.

In preparation, we can flex our ethical muscles by asking ourselves these questions:

• Am I aware of my personal ethical position? How does it differ from that of the board?
• Do my personal values and principles align with those of the organization? If not, does that create a conflict when it comes to decision-making?
• Do I understand my own motivations and biases? How would my motivations look from an external perspective?
• Do I know my preferred style of decision-making? Am I open to different approaches?
• Can I recognize and declare when I’m out of my depth? If so, am I prepared to seek advice?
• Am I prepared emotionally and intellectually for potentially difficult debate in the boardroom?

Your takeaways:

• Ethics seeks to answer the practical question What ought we to do?
• It’s helpful to view ethics from different perspectives – external influences, board culture, interpersonal dynamics, and individual values.
• The five-step ethical decision-making process - frame, shape, evaluate, refine, act - offers a clear and reliable method to address the ethical dimensions of a board decision.
• As individual directors, we all have a part to play in bringing ethical decision-making to life in the boardroom. This will help the board to broaden the way it thinks about an issue and to arrive at a defensible decision.

Resources:

• Ethics in the Boardroom – A Guide to Decision Making. Australian Institute of Company Directors and The Ethics Centre. October 2019.
• Ethical decision making: 3 actions items for boards. Australian Institute of Company Directors. October 2019.
• Redefining ethical boardroom decision-making. Raconteur Insights.
• Ethical Behavior for Board Members Is Culturally Driven. Nick Price. BoardEffect. August 2017.

Leave a comment below to get in on the conversation.

Thank you.

Scott

Scott Baldwin is a certified corporate director (ICD.D) and co-founder of DirectorPrep.com – an online hub with hundreds of guideline questions and resources to help prepare for your next board meeting.

Share Your Insight: What factors are considered on your board when making an ethical decision?