Many of the inappropriate actions of executive directors took place behind a veil of secrecy, writes Gerald Flynn

WHAT BETTER endorsement can a person in business receive from a reputable third party than that “her word is her bond”? Just five words that wrap up credibility, reliability and integrity and suggest competence and ability.

For centuries it has been the foundation of business transactions despite all the legal contributions to contract law and specific performance.

Business credibility has taken a hammering over the past 18 months with the economic meltdown exposing the lies and distortions which lay at the heart of many leading business organisations. Some of those who promoted themselves as business leaders and people of vision have been shown to have been naïve and incompetent at best and personally greedy and corrupt at worst.

The inevitable response has been a cyclical return to discuss business ethics and standards of “corporate governance”. Who are likely to take a lead in promoting ethical behaviour in workplaces and boardrooms? Will HR managers have the personal courage to follow in the steps of some spirited internal auditors who were sidelined for questioning runaway speculation? Shortly after the dot com realignment in 2001, I started a master’s business programme in one of the better graduate business schools.

The course programme contained all the usual segments about organisational analysis, company law, effective communications, negotiation styles and, tagged on suspiciously at the end, was “business ethics”.

I was not sure what it was then and after graduation was none the wiser as, not unexpectedly, they never quite got to cover what was probably a well-intentioned afterthought.

It was all part of the post-Enron, Tyco, Peregrine Systems and WorldCom hysteria which seriously undermined the reputations of some of the global accountancy franchises. Within months it led to the Sarbanes-Oxley Act in the US which tried to tighten regulation to protect investors and reform public company accounting standards.

We did something similar in Ireland with the Company (Accountancy and Auditing) Bill but it met strong business lobby opposition over a requirement for directors to provide individual statements of compliance and stricter rules for audit committees to exclude former company executives.

With hindsight, having seen what former executives can do when they take over senior board positions, such as hiding huge personal borrowings by bed and breakfasting them for the year-end audit, this objection now looks to have been rather naive.

The key issue is secrecy. Many of the inappropriate or high-risk actions of executive directors were conducted behind a veil of secrecy and the few internal audit people who raised objections in some Irish and UK banks were sidelined, moved or shown the door only to re-emerge in recent months with their professional reputations at least partly vindicated.

A key problem with the Irish view of corporate governance is that it is often confined to accountancy standards and stock exchange rules.

There is something pathetic about large public companies issuing statements that their directors “did nothing illegal” when some of them clearly colluded to mislead investors, auditors, employees and customers.

This is where business ethics gets back to basics. It is about honesty and fair dealing rather than strict compliance with company law obligations. It is about being truthful and not misleading even for the questionably noble motivation of protecting shareholder value.

Are we going to have another cyclical spin of the business ethics merry-go-round?

Already there have been noises about “a few bad apples” and condemnations that “the media” are picking on individual high-profile bankers with warnings not to overreact and advice to wait for guidance from international stock exchange regulators rather than address the problems of corporate dishonesty.

A different view emerging is that some managers will have to take up the cudgels of promoting ethical behaviour despite the reasonable philosophical questioning of whether there really is such a species as ethics at all.

Step forward the humble HR manager or the more formidable strategic human resource director. The chief executive of the Chartered Institute of Personnel and Development (CIPD), Jackie Orme, has suggested that senior personnel managers might take up the role of ethical champions.

She said that the current financial crisis and huge corporate failures have brought the ethical questions in business into even sharper focus. “That the excesses of the banking sector were allowed to go unchecked for so long, bringing the world economy to its knees, raises difficult questions for HR – and for many colleagues in other functions too.”

Questions posed recently by Ms Orme include: “Was there more we could have done to point out the blind risk-taking, the lax leadership and the extraordinary reward culture that contributed to the catastrophe we now face?

“And what lessons can we learn to ensure we do better next time?” The CIPD chief warned senior HR managers that they “can spend too much time worrying about getting a seat at the boards rather than having the courage to stand up and be counted more often on the ethical failings that we can see will damage the long-term interests of our organisations”.

The issue of business ethics may go off the boil again within two or three years.

Then it may be time to dust down the “few bad apples” arguments. A flavour of these objections was contained in one 2003 submission: “The requirement of a director’s compliance statement is, in our view, an overreaction to corporate scandals involving only a small proportion of large and globally traded companies. The proposal to impose on virtually all companies an administrative burden of the extent envisaged in the aftermath of considerable beefing up of company law enforcement in particular, in this country, is difficult to fathom.”

The requirements applied to fewer than one-in-50 Irish companies. Less than six years ago the official Irish business attitude to tighter compliance statements for directors of large (€15 million-plus turnover) private companies was: “Furthermore, we have some fears for the confidentiality and competitive risks to companies given the public nature of the proposed compliance statement.

“While it may be appropriate and necessary for public companies to have publicly accountable disclosure requirements, we do not believe this is the case for private companies.

“If there is a breach of relevant obligations, the company will now be obliged to declare that breach and expose itself to the potential for inappropriate media scrutiny, regardless of whether the company is publicly traded or not.”

This was after revelations of widespread tax fraud, bribery of politicians, overcharging of vulnerable customers and misleading profit statements. Sustained lobbying ensured that the initial requirement for a personal director’s compliance statement was watered-down two years later to a directors’ opinion.

We have no guarantees that we will learn any lessons for business practice and decision-making from the latest round of reckless behaviour unless the issues of ethics and “moral behaviour” are widely addressed in bars, boardrooms, bistros and business schools.

Gerald Flynn is an employment specialist with Align Management Solutions in Dublin