Governance Worries Put Ethics on Directors' Agenda
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Governance Worries Put Ethics on Directors' Agenda

New governance standards have caused a growing number of boards of directors worldwide to become more involved in companies’ ethics programs, according to a report by The Conference Board.

Paul Holmes

New governance standards have caused a growing number of boards of directors worldwide to become more involved in companies’ ethics programs, according to a report by The Conference Board. But the level of board involvement in ethics programs remains considerably lower in the U.S. than it is in other parts of the world.

Almost all (97 percent) of the 165 companies surveyed have ethics programs, and outside of the U.S. and Western Europe nearly all company ethics programs were established by the board of directors, while the figure for U.S. programs launched by board resolution is lower (66 percent).

“While corporate scandals and the Sarbanes-Oxley legislation may have been strong factors for U.S. boards to exercise greater ethics program oversight, directors in other parts of the world were often motivated by other factors,” says Ronald Berenbeim, principal researcher at The Conference Board and co-author of the report with Jeffrey Kaplan of Stier Anderson. “But in all countries and regions, the public and shareholders expect the board of directors to play an important role in monitoring a company’s ethics practices, policies, and performance and, increasingly, directors are recognizing that responsibility.”

In the U.S., general legal developments were most often cited as a relevant factor for greater board scrutiny of ethics programs. But in the U.K., India, and Western Europe, survey participants often cited “enhancement of reputation” as a reason behind directors’ involvement in ethics issues. In Japan, “laws, regulation and/or rules relevant to business” were cited most often.

Compared with other regions and countries, reputational risk was of relatively little importance to U.S. boards. Only 20 percent of U.S. survey participants said that it was a most relevant factor. But reputational risk appears to be a much more important motivating factor for boards elsewhere. A total of 75 percent of respondents in India, 62 percent in the U.K., and 46 percent in Western Europe cited it as a most relevant factor.

In all countries and regions except Japan, most boards have a defined role in overseeing ethics programs. More than two thirds (69 percent) of U.K. boards and 74 percent of Western European boards delegate the ethics program oversight responsibility to a committee.

The choice of committees varies considerably within regions. In the U.S., more than three-quarters of the participating companies delegate program oversight to the audit committee. No company reported that this task was assigned to an ethics committee. Almost two-thirds (63 percent) of Japanese boards vest such authority in an ethics committee.

In nearly half of the U.S. companies surveyed, the general counsel is the executive with principal responsibility for reporting to the Board on ethics or compliance issues. But in the U.K., India, and Western Europe, CEOs are more likely to take the lead in discussing ethics and compliance matters with the board. In the Indian and Western European companies, the task may also be assigned to the internal auditor.

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