UK boards start to take values and ethics more seriously

Audit committees are increasingly overloaded and UK companies are looking at other way to monitor corporate responsibility (CR)  and sustainability issues, according to a report published by the Institute of Business Ethics (IBE).

An IBE survey of the FTSE 350 carried out with the support of the ICSA: The Governance Institute and Mazars found that 55 companies have set up separate board-level committees to deal with CR, ethics and sustainability issues. Of these over half of them are specifically charged with advising the board on ethics and values although the number of committees with oversight of the company’s internal code of ethics or the embedding of and compliance with ethical policies is far few –  nine companies in the FTSE 100 and seven in the FTSE 250.

The author, IBE Associate Director Peter Montagnon writes that, “while audit committees retain their core role of monitoring financial arrangements and reporting, as well as of overseeing internal controls, they are operating in a world where non-financial risks are growing, with potential consequences for reputation and for conduct risk.”

The IBE’s report considers whether creating these new committees are the right approach to dealing with the issues of ethics, values, CR and sustainability. Examining the committees that have been formed by boards the research found that they serve a number of different purposes. The IBE found these ranged from reputational issues around corporate responsibility to compliance with non-financial regulation such as health and safety and legislation to do with bribery. A number of companies, particularly those domiciled outside the UK but listed here, also mandated their committee to oversee compliance with the UK Governance Code, Listing Rules, Transparency, Prospectus and Disclosure Rules.

Most of the companies with committees explicitly outlined environmental, social and governance issues as their primary purpose in their terms of reference but a number of other issues were explicitly mentioned. The most important of these were ethics – which usually included health and safety, conduct, compliance, reputation, risk (including regulatory risk) and sustainability. Other priorities which received a mention included animal welfare, political risk and licence to operate, and also information security.

The IBE survey found that most of the terms of reference contain the requirement for the committees to have regular evaluation of their performance.

Analysing the 24 companies that have not appointed even a sub-board committee to focus on CR and related issues the survey found that 64% of them said the board regularly monitored matters relating to ethics, culture and corporate responsibility. Nearly three fifths (59%) said the issues were covered by the audit and risk committees. Over one third (36%) also said the remuneration committee had a mandate to consider ethics/culture in setting policy, while almost two thirds (64%) said their board received training in ethics and culture. Meanwhile 43% said their board received external advice in matters relating to ethics, culture and relations with stakeholders. Meanwhile, survey responses showed nine companies which have a sub-board committee dealing with ethics, culture and corporate responsibility.

Montagnon concludes that while the board level committees that have been created are making a contribution to good governance at companies there was not yet a case  for making them mandatory. However, he argued that companies do need to be aware of the need to manage a wide and growing range of non-financial risks.

Meanwhile a workshop hosted at the end of December by the IBE, ICSA and the International Corporate Governance Network suggested that high levels of corporate stress, flawed remuneration policies, excessive reliance on takeovers, and lax financial discipline may indicate poor corporate culture.  Participants suggested that a major source of corporate stress was when corporate leaderships imposed short‐term targets which staff found difficult to meet. This could exacerbate a rift between staff and management.

“We have observed a failure of culture not just in the banks, but in other recent corporate crises, including Tesco, Toshiba and VW. It is in everybody’s interest to understand the warning signs and help companies develop a strong culture which reduces unnecessary risks,” said Peter Montagnon, the report’s author who is also chair of the ICGN Business Ethics Committee.

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