GOVERNANCE, ETHICS AND CORPORATE RESPONSIBILITY - WHERE TO FROM HERE ?
Two simple factors provide a rational explanation for current executive remuneration increases, but do little to address the deeper, more contentious issues now being thrown up about the ethical and value judgements surrounding such increases.
Ian Dunlop, CEO, Australian Institute of Company Directors
Conventional wisdom has it that an inevitable outcome of globalisation is the emergence of an international market for executive talent, in which rates of pay are significantly higher than Australian norms. With directors under continuing pressure for performance, not least from the 50% of the Australian community who now own shares, companies have little choice but to seek and retain the best available people, which may require a substantial increase in remuneration to attract them. Similarly the move toward pay-for-performance results in higher remuneration if performance is forthcoming, albeit the linkage at present is often far too weak. As predicted, the disclosure of detailed remuneration arrangements, now required under the Corporations Law is also having a ratcheting-up effect and, ironically, making it harder to implement genuine pay-for-performance.
These factors provide a rational explanation for current remuneration increases, but do little to address the deeper, more contentious issues now being thrown up.
For example, how much is any individual worth? Are the individuals concerned genuinely motivated by the largesse bestowed upon them, and what does it do for their own value systems?. What are the implications within organisations and within society if the disparity between the few and the majority becomes excessive? At what point does disparity of this nature start to impact negatively on corporate reputation, motivation and the bottom line? How do you establish a sustainable link between genuine corporate performance and pay?
In each case ethical and value judgements are required which go far beyond conventional concepts of corporate responsibility and governance to the very heart of the type of society we want to create.
Today any well-run board will have thought through issues such as the need to provide appropriate checks and balances to prevent the abuse of power, to provide a high level of transparency as a means of developing trust with stakeholders, to select board members and management with appropriate skills and to regularly assess the performance of both board and management.
While these issues will continue to be important, the real debate is moving on to the role of the corporation in this rapidly changing world.
Power is being shared increasingly between boards, owners and individuals. Power is also flowing from other traditional elite groups to new forms of organisation with a global, as opposed to a national, focus. The legitimacy of these groups, both old and new, is a matter of intense debate.
Additionally, governments and nation states are increasingly constrained in their ability to undertake the role they have traditionally played. At the same time the structures under which global interaction is occurring are poorly defined.
Corporate responsibility is being redefined accordingly. In essence, to what extent should corporations take up a wider responsibility to fill the vacuum created by the declining role of national governments, and what legitimacy do they have to do that?
The dilemma is the extent to which corporations should even try to take a larger role in addressing social or political problems, as many governments are now urging them to do by way of public- private sector partnerships. Indeed if they were to take on these roles, how do they generate the authority to do so? Would societies be willing to give corporations the licence to accomplish those tasks – if so, how would the limits of such roles be define, to whom are corporations accountable in an increasingly fragmented world, and under what value systems do they operate?.
Business talks frequently about the licence to operate
, meaning the activities which societies allow business to undertake as a private profit-making enterprise. But that licence to operate
has been discussed thus far in limited economic terms, not encompassing the concepts of wider authority and trust.
Corporations do not have authority in the same way that government and other political and religious institutions have. A corporation has a remit to act as a commercial enterprise, not a social, political or moral authority. Corporations have power, but essentially it is economic power, not political or social power.
Part of the process of redefining legitimacy in times of great uncertainty must be far greater self-regulation along with the adoption of higher ethical standards, greater transparency and disclosure. This applies not just to corporations but equally to governments and institutions in general.
Some companies are well advanced in addressing these issues. This is reflected in the extensive reporting on environmental, social and global issues now being generated by these organisations, in addition to traditional financial reporting – the triple bottom line
. These companies recognise that changing societal values require greater community engagement than hitherto, along with genuine commitment to sustainable development notwithstanding the adjustment costs it may incur.
More conservative views, both corporate and investor, argue that if board attention is diverted from a strict focus on the bottom line of increasing shareholder value, directors are being derelict in their duty and accountability is lost.
In practice the two views may not be that far apart. But the former view recognises that given changing societal values, shareholder value will not be generated without far greater attention to these wider issues. In essence there is no disagreement on the ultimate objective of increasing shareholder value, rather on the means of getting there. Those who get it right will gain significant competitive advantage!
A pre-requisite has to be genuine commitment
to higher ethical standards and corresponding value systems.
That genuine commitment requires strong leadership, a preparedness to think outside the box and not to follow the herd. Boards of directors, whether they be corporate, government or not-for-profit, have a critical leadership role to play in addressing these matters and raising standards as we enter the new decade.
IAN T DUNLOP
Chief Executive Officer