Lately, something interesting has been happening in the compliance world. After the course on deregulation was announced in the US, and with some regulatory ‘easing’ in other jurisdictions, the profession went into a mild existential crisis.
It won’t be much of a revelation to say that, over recent decades, the significant investment in compliance programmes across organisations big and small was mostly driven by regulatory and enforcement activity, and not necessarily by an internally anchored basis for restraint. When these external pressures were put on pause, the basis of the enforcement-driven approach came into question.
Over the decades, ethics, governance and compliance conversations with business leaders worldwide have almost always circled back to the legal question of ‘What are we allowed to do?’ But this approach only works when a strong regulatory framework, as well as the rule of law, are both firmly in place. What happens when they are not?
Ethical oversight is not an extra-credit morality – it is a central part of how directors do their job
Law firms have been describing, off the record, how their clients were calling in with a blunt question: ‘Is it OK now to offer bribes?’ Whether meant seriously or opportunistically, the moment seems right to remind ourselves that ethics is not just about compliance, and that just because something can be done does not mean it should be done.
Embed ethics
As political and economic volatility intensifies, public scrutiny of corporate leadership is extending beyond CEOs to the boardroom itself, with mounting questions over whether directors are exercising the long-term judgment and moral seriousness their roles demand.
As professional accountants, we know that directors, especially independent ones, are responsible for corporate integrity and accountability, and boards are positioned to help the organisation make decisions that are both good and right by setting core values and principles, and applying them in their own decisions and conduct. Best practice among the frontrunners is to use an ethical framework that provides the board with the basis for defining the organisation’s place in the world – as a matter of choice rather than in reaction to changing external pressures from markets, politics or public sentiment.
That becomes especially valuable in periods of high volatility and institutional uncertainty. It may also, almost as a side effect, reduce the need for more prescriptive governmental regulation.
Choices and consequences
Ethics is ultimately about choices and their consequences. Recent evidence suggests that the choices directors make are failing to impress investors, shareholders, executives and other third parties whose interests are linked to or affected by directors’ decisions. The directors share the sentiment: to cite one of many surveys, 46% of directors themselves believe that their boards do not add enough value to their organisations, while 31% think that their board is adding no value at all.
At a high level, by adding value, we typically mean fulfilling fiduciary and statutory duties, including acting in the best interests of the organisation. On a more practical, operational level, however, it means being curious, engaged and independent in judgment, asking difficult questions, insisting on a thoughtful decision-making process, weighing trade-offs and impacts, and acting as the organisation’s ‘loyal opposition’. It should be supportive when management serves the long-term interests of the enterprise and firmly challenging when it doesn’t.
Those are the things that make a board useful. They are also not coincidentally ethical practices. Ethical oversight is not a new statement of obligations or an extra-credit morality. It is a central part of how directors do their job well and retain legitimacy.
We should not be abandoning compliance but putting it back in appropriate proportion
The above statistics are alarming but not completely surprising. A lot of directors feel like compliance machines, endlessly ticking the boxes. It seems that the gap between compliance and ethics, between what an organisation can do and what it should do, has widened just enough to show that governing the space between the two is where directors add value.
We should not be abandoning compliance but putting it back in appropriate proportion. Directors need to judge more carefully how much of the board agenda is devoted to process, structure and liability management, and how director time is used for ethical, value-adding practices, in areas where rules are insufficient or external enforcement is weak or inconsistent.
The current deregulatory moment has exposed something critical: if the compliance profession is now confronting the fact that compliance without ethics was never enough even for its own purposes, it cannot possibly be enough for boards. The question is whether directors will learn from that.
More information
See more insights from ACCA’s risk community. For enquiries, contact its chair Rachael Johnson
