Why are values, morals, and ethics important? V2

What is the purpose of this article?

Help founders, corporate leadership, investors, and their coaches and advisory boards begin a discussion regarding VME (values, morals, and ethics).

You may download a PDF of this article from: Why are values, morals, and ethics important V2

What are the critical learnings in this article?

  • You need to have a shared and commonly understood definition of values, morals, and ethics.
  • You need to define how VME is used in decision making and to guide the behaviour of everyone in your company.

What are VME?

People often use these terms interchangeably. The concepts are different, which can result in confusing sets of expectations. E.g. many board of director’s mandates mention meeting “highest ethical standards”, but what does that actually mean? Many in corporate leadership1 believe ethics means compliance with laws, regulations, and company policies.  Many in the broader public associate ethics with morals and doing what is right.

To illustrate the confusion: for a few years Apple Computer only paid .005% income tax on billions of Euros of profit in Ireland.  The CEO stated that what Apple did was OK because all the laws were followed.  Many people felt that paying .005% income tax was “not the right thing to do.”

The following are my definitions.  You should have your own definitions.  You cannot have a discussion about VME if everyone has different definition of what the words mean.

Values: Values are the rules by which people make decisions about what they should or should not do. Values have different importance’s, which is helpful when needed to trade off or balance one value versus other values. Values are what someone thinks and feels internally.

Morals: Morals are decisions, actions, and behaviours which other people feel are right or wrong, good or bad.  Morals are actions and behaviours arising from one or more values.  Not all values are related to morals.  You are judged by others as to whether or not your actions and behaviours are moral or immoral.

Ethics: Ethical decisions, actions, and behaviours are based on following a documented set of standards or principles.   Many companies and professions have a Code of Ethics.

VME should also tie back to the purpose of the corporation.1 Is the sole purpose to make as much money as possible, constrained by laws, regulations, and company policies?

How are VME used?

VME are used by the board of directors, CEO, C-Suite and major investors when making decisions and taking action within the company’s ecosystem.2  Ecosystem members (such as employees, the public, customers, suppliers) may have major differences in their individual VME.  Corporate leadership uses their personal VME to manage the conflicts of interests within corporate leadership, and with ecosystem members.

Lawyers would point out the fiduciary duty e.g. in Canada to act in the best interest of the corporation (fiduciary duty varies by country).  But is that the right thing to do?  Professor Didier Cossin makes the following observation, “The doctrine of maximizing profitability may be used as justification for deceiving customers, polluting the environment, evading taxes, squeezing suppliers, and treating employees as commodities. Companies that operate in this way are not contributors to society. Instead, they are viewed as value extractors. Conscientious directors are able to distinguish good from bad and are more likely to act as stewards for safeguarding long-term, responsible value creation for the common good of humanity. When a company’s purpose is in conflict with the interests of society, board members need to take an ethical stand, exercise care, and make sensible decisions.”3

Documented ethics arise from interactions between your company and its ecosystem members. Your company, and others, may be lobbying the government to change laws and regulations to benefit what they believe is important (i.e. their values and morals).  How should corporate leadership deal with the conflict of interest regarding laws and regulations which provide value to society vs providing value to the corporation?  Some people believe laws and regulations exist to protect the interests of society as a whole or protect those who cannot protect themselves.  Some companies have Codes of Ethics written to minimize legal risks to corporate leadership.

Some companies use values, morals, and ethics play in hiring, promotions, and terminations. Warren Buffet said “You’re looking for three things, generally, in a person: intelligence, energy, and integrity.  And if they don’t have the last one, don’t even bother with the first two”.

How do values, morals and ethics impact company value growth and preservation?

Positive or good values, morals, and ethics are not a pre-requisite for company value growth and preservation.  I sure you can think of some example – I know I can.

Poor VME can lead to the following major company risks;

  • Company leaders may engage in fraud or illegal actions.
  • In 2002, Arthur Andersen was found guilty of a criminal act, based on one single email. (Incredible but true). As a result, this large global audit firm went out of business.
  • Companies may lose their social license to operate. In 2022, the European Union, Australia and other country government were actively seeking laws and regulations to restrict the activities of major high tech companies. Governments felt that the companies were not acting in the best interests of society.
  • There can be challenges in recruiting and retaining the elite talent necessary to grow in the intensely competitive global ecosystem.
  • The value from mergers and acquisitions can be threatened when companies have different sets of VME. It can be extremely hard to change the VME of people. Even ensuring compliance with a new set of documented ethical standards may be a challenge.

What are the challenges of VME?

The challenges of VME include:

  • What do you do when VME could reduce long term profits? Some companies consciously decided to take actions which they believe is better for the broader society but may result in lower profits. g. Vancity Credit Union (in Vancouver, British Columbia) pays its workers a living wage and expects its suppliers to pay their workers a living wage.  On the other hand, Loblaws shareholders, in an early 2018 Annual General Meeting, voted not to pay workers a living wage.
  • Shareholders trust the board of directors to make the right decisions. The board, in turn, delegates the bulk of authority to the CEO.  The board and the CEO must be able to manage a broad range of conflicts of interest, especially personal.  g. with average CEO tenure below 4 years, it can be a challenge for the CEO to focus on the long-term, rather than maximizing the value of short-term bonuses and stock options.  Directors have been known to question a merger when their own director roles are in jeopardy.
  • If the board and CEO have different sets of VME, then the CEO’s decision making, and tone setting for the company, will not be aligned with the board.
  • Corporate leadership, through their actions and behaviours, communicates what the acceptable VME are. It is important that the leadership, when making difficult decisions, communicates how those decisions are related to VME. Children by the age of seven have already developed a set of values and morals.4 They observe their parents and learn from their parents.
  • The most difficult decisions made by corporate leadership (e.g. times of crisis, cost-cutting, re-organization, major merger, major change in strategy, CEO appointment or termination, etc.) often reveal what the true VME are. It’s easy to talk about VME when it does not take major personal courage to make a difficult decision.

What are your next steps?

You need to customize the following generic plan for your specific company.

  • Survey the board of directors, C-Suite, and a sample of employees, asking what they observe the purpose of the company is and what the purpose should be.
  • Survey the board of directors, C-Suite, and a sample of employees, asking what they observe the companies values to be. In the case of the employees, asking them what they observe the values of the board of directors and C-Suite to be.
  • Survey the board of directors, C-Suite, and a sample of employees, asking what whether of not the leaders are following the documented code of ethics.
  • Survey the board of directors, C-Suite, and a sample of employees, asking what they observe the purpose of the company is and what the purpose should be.
  • Look back over the past 5 years. How have VME guided critical board and CEO actions?  g. during crisis, making important one-time decisions such as appointing or terminating a CEO.
  • What questions, if any, are asked of director candidates and CEO candidates to assess their understanding and commitment to the company’s VME? Which VME, if any, are a perquisite for hiring? Which violations of VME result in immediate termination or hold back promotion?
  • Analyze the above data to identify things such as: differences among your company leadership, differences between your employees and your company leaderships, differences between what is documented vs actual behaviours and actions.
  • What are the definitions of VME used by your corporate leadership? If your company has documented values, how are they used?  What are employees supposed to do with the values?  How do you know how the employees are using the values, if at all?
  • Read and discuss the values of the United States Army. What are the differences between your company values and morals relative to the U.S. Army.  The Army explicitly identifies morals – do your company values identify morals? The Army values guide individual conduct 24 hours a day. Are your VME intended to guide decision making, actions and behaviours only during working hours or 24 hours a day?  Some would argue that the company has no business in what an employee does in their non-working hours.
  • Prepare a short collection of stories describing how corporate leadership and employees should make decisions and behave in key situations.
  • Revise your company values and code of ethics to reflect those stories.
  • Put in place processes to communicate and use the company values and code of ethics e.g. prior to each board meeting, every attendee reads the company values and code of ethics. As each key board decision is being made, briefly discuss how the decision reflects the company values and code of ethics. The board should also consider the degree to which the members of the company’s ecosystem would view the decision as moral.

Footnotes

1 Purpose of the corporation definition: What is the purpose of the corporation and why does it exist?

Is the only purpose of the corporation to create wealth?  Is there a higher purpose, either to a community or to society?  Or you may conclude the only purpose is to create wealth for shareholders and the C-Suite.  Peter Drucker said: “Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

2 Ecosystem definition: A business ecosystem is the network of people and organizations, including stakeholders and third parties directly and indirectly involved in the delivery of a specific product or service through both competition and cooperation. The idea is that each entity in the ecosystem affects and is affected by the others, creating a constantly evolving set and nature of relationships in which each entity must be flexible and adaptable in order to survive, as in a biological ecosystem. Stakeholder definition: Stakeholders have an economic interest in the corporation: Shareholders, Non-equity capital, Customers/ users, Employees/ unions, Suppliers, partners

Third party definition: Politicians, Regulators, Third party standard setters (e.g. Proxy advisory firm, accountants, lawyers), Society

3 “The four tiers of conflict of interest faced by boards of directors”, Professor Didier Cossin and Abraham Longze Lu, IMD Global Board Centre   https://www.imd.org/research-knowledge/articles/the-four-tiers-of-conflict-of-interest-faced-by-board-directors/

4 “Teaching young children morals”, Meri Wallace, Psychology Today, April 6, 2018

https://www.psychologytoday.com/ca/blog/how-raise-happy-cooperative-child/201804/teaching-young-children-morals

 Further reading

“Society’s trust in corporate leadership and political leadership is low”  koorandassociates.org  Society’s trust in corporate leadership and political leadership is low.

“Values – U.S. Army” koorandassociates.org Values – U.S. Army

“Why is trust critical for transformation” koorandassociates.org Why is trust critical for transformation success?

Leaders eat last University of California – Davis, Center for Student involvement https://csi.ucdavis.edu/leaders-eat-last/

What is the purpose of your company?

https://koorandassociates.org/corporate-governance/what-is-the-purpose-of-your-company/

Tools

“What are your values and morals? Survey Tool”, koorandassocicates.org What are your values and morals? Survey Tool

What are your values, morals, and ethics?

What are your values, morals, and ethics?

A breakdown of values, morals, and ethics  within society risks social upheaval which may devastate businesses. In 2021 and 2022 Canada and the U.S. have seen major social upheaval.

The 2022  Edelman Global Trust Barometer1 has disturbing statistics:

  • 52% of people agree capitalism as it exists today does more harm than good.
  • 85% of people worry about job loss.
  • 57% experience prejudice or racism.
  • 66% believe government leaders are purposefully trying to mislead people by saying things they know are false or gross exaggeration.
  • 42% trust government leaders.
  • 48% believe government is a dividing force in society.

The 2022  Edelman CanadianTrust Barometer show Canada is similar to the rest of the world.

  • 48% of people agree capitalism as it exists today does more harm than good.
  • 34% of Canadian believe they and their families will be better off in 5 years time,
  • 74% of people worry about job loss.
  • 42% experience prejudice or racism.
  • 58% believe government leaders are purposefully trying to mislead people by saying things they know are false or gross exaggeration.
  • 43% trust government leaders.
  • 45% believe government is a dividing force in society.

6 surveys done in 2018 by Professors Michael Bang Petersen, Mathias Osmundsen, and Kevin Arceneaux3 revealed:

  • 24% of the American public agreed “society should be burned to the ground”
  • 40% of the American public agreed “we cannot fix the problems in our social institutions we need to tear them down and start over” and “when it comes to our political and social institutions, I cannot help thinking ‘just let them all burn’”.
  • Key findings include: people are so discontent that they do not care about truth; people deliberately share false and hostile rumours on social media with the goal ”to mobilize the audience in pursuit of chaos.”

My personal observation is that if people believe their interests are not being looked after by institutions and society, then the sense of frustration can lead to tearing them down.  I wonder if politicians, CEOs, and boards of directors understand the long-term implications of their actions to destroy the public’s trust in them.

Footnotes

1 2022 Edelman Trust Barometer – global report

https://www.edelman.com/sites/g/files/aatuss191/files/2022-01/2022%20Edelman%20Trust%20Barometer%20Global%20Report_Final.pdf

2 2022 Edelman Trust Barometer – Canada

https://www.edelman.ca/trust-barometer/2022-edelman-trust-barometer-trust-canada

 3 Professors Michael Bang Petersen, Mathias Osmundsen, and Kevin Arceneaux  “A ‘Need for Chaos’ and the Sharing of Hostile Political Rumors in Advanced Democracies”.  In 2019 won the award for best paper in the Political Psychology division of the American Political Science Association.

What are your company’s values?

What is the purpose of this article?

Outline a list of questions to help discuss what the purpose of company values are and what should be the values.

You can download a PDF of this article from:

Click to access what-are-your-companys-values.pdf

What are values?

Values are the rules by which people make decisions about what they should or should not do.

Further reading:

Values, morals, and ethics  https://koorandassociates.org/values-morals-and-ethics/

Questions to consider

  • How do the board of directors, C-Suite, and every employee use your company values to guide decision making and behaviour?
  • How do your company values compare to the U.S. army values? https://koorandassociates.org/further-reading/values-u-s-army/
  • How do your stakeholders (e.g. employees, customers, suppliers, partners, community and society) perceive your company values?
  • How do your company values impact employee hiring and retention?
  • How do your company values impact customer recommendations any buying actions?

Your next steps

  • Survey your stakeholders to see how they perceive your company values. Determine the actions and behaviours which result in those stakeholder perceptions.
  • Compare the stakeholder perceptions to the documented values.
  • What are the gaps?
  • What are the implications of the gaps?
  • What is the impact of addressing some or all of the gaps?

 Further Reading

Why are values, morals, and ethics important? https://koorandassociates.org/values-morals-and-ethics/why-are-values-morals-and-ethics-important/

How to assess director and CEO candidates regarding values, morals, and ethics https://koorandassociates.org/values-morals-and-ethics/how-to-assess-director-and-ceo-candidates-regarding-values-morals-and-ethics/

Should leadership compensation be sustained by bailouts?

Should leadership compensation be sustained by bailouts?

 Should board director and C-Suite compensation and shareholder dividends be sustained by government COVID-19 bailouts?

 This is a question regarding values, morals, and ethics not a question of whether or not laws are being broken.

I’ve been reading about many companies receiving large government COVID-19 bailouts while leadership bonuses are paid and even increasing; shareholder dividends are continuing or in some cases increasing. I have read some startup CEOs posting that they have eliminated their personal compensation in order to support the team.

In this time of massive government financial support, should board directors reduce their compensation?  Should C-Suite compensation be reduced?  Should dividends be reduced? Should these savings be redirected to support junior employees or other stakeholders?

Should the leadership and shareholders be suffering a small amount of discomfort while many are unemployed and many small businesses are collapsing?  Should the leadership and shareholders help society and the rest of the team at their companies?

In 1981, the U.S. Business Roundtable published the following:

“Corporations have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.” “Business and society have a symbiotic relationship: The long-term viability of the corporation depends upon its responsibility to the society of which it is a part.  The well-being of society also depends upon profitable and responsible business enterprises.”1

 Larry Fink (CEO of Blackrock – with close to $8 trillion of assets under management), in his 2018 letter to CEOs, said “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate…..Without a sense of purpose, no company, either public or private, can achieve its full potential…..And ultimately, that company will provide subpar returns to the investors.”

What do you think is the moral and ethical thing to do?

Footnotes:

1 Ralph Gomory and Richard Sylla, “The American Corporation”, April 2013, page 6, The Wall Street Journal http://online.wsj.com/public/resources/documents/50b74ca9c91e6TheAmericanCorporation11292012.doc.pdf

2 https://www.blackrock.com/corporate/investor-relations/2018-larry-fink-ceo-letter

How to assess director and CEO candidates – regarding values, morals, and ethics. (V2)

There have been numerous corporate scandals, with questions as to “where were the directors?”  It is up to each board to establish a common understanding of, and commitment to, what they mean by values, morals, and ethics.  Based on this common understanding, the board can then assess director and CEO candidates. This document is a tool designed to enable discussion leading to that common understanding

This tool does not provide any recommendations or advice as to what are appropriate values, morals, and ethics. The focus on possible behavioural questions (i.e., can be confirmed via reference checking) to ask director and CEO candidates.  Skills or functional competencies are not addressed.  Each board should identify additional questions.  This tool is illustrative and not intended to be a comprehensive set of questions.

The nomination committee/board should have a discussion on each question and document:

  • What might be good, OK, or unacceptable answers.
  • Which answers would eliminate the candidate from further consideration.

Directors and the CEO should be passionately committed to the purpose of the company

What is the purpose of the company? Why does the company exist? The description of the purpose of the company should be positive and outwardly focused on how you benefit customers and society.  For example, Nike’s “authentic athletic performance,” rather than “sell lots of shoes made in China.”  Is the purpose of the corporation to make as much money as possible? How should the company benefit society?  Or, should it?

Larry Fink, in his 2018 letter to CEOs, said “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate…..Without a sense of purpose, no company, either public or private, can achieve its full potential…..And ultimately, that company will provide subpar returns to the investors.”1

The passionate commitment to purpose will set the tone from the top and quickly percolate throughout the company.  The purpose is the foundation upon which values, morals, and ethics are based.

I do not have any suggestions as to how to assess a candidate’s passionate commitment to purpose.  It will be clear within a year if a director or CEO doesn’t have passionate commitment to the purpose – which presents a major decision for the board to make.

Which director decision has the greatest impact on long-term corporate value?

Many would advocate this decision is the appointment (or termination) of the CEO.  Let’s first consider some possible questions to ask each director candidate who would have to vote on CEO appointment or termination.

  • What is the most senior level position you have terminated?
    1. Why? Performance (i.e. impact on profit or value creation and preservation)? Non-compliance with laws, regulations or company policies? Ethics or values?
  • Looking back over your career, what’s an example of person you decided not to hire or promote, due to ethics or values?
    1. What were the ethics and values issues?
  • What is the most senior level person you either appointed or recommended for appointment?
    1. What were the three most important reasons for that decision?
  • As you look back over the people you have appointed or recommended for appointment, what was your greatest mistake? How did you determine it was a mistake?  How did your correct your mistake? What have you done differently since then, when appointing people, or recommending appointments?

Now, let’s look at the values, morals, and ethics questions that you could ask of both director and CEO candidates:

  • What is the most courageous business action you’ve taken, and what was the impact on company profit, your career, and your family’s financial situation?
  • What was the most difficult ethical business decision you have made, and what was the impact on company profit? What definition of ethics did you have in this situation?
  • What has been the greatest crisis you have had to resolve? What was your role?
  • When dealing with an issue, what is an example of how your probed deeper into the company to understand the causes of the issue?
  • What is the biggest issue or problem you’ve encountered where you wished you’d informed the board earlier?
  • What was the most significant issue regarding ethics, values or morals, which a subordinate or colleague brought to your attention? How did you deal with it?

The following questions address the beliefs a candidate has:

  • Should a company invest in a country, or have operations in a country, in which:
    1. Child labour is common.
    2. The rule of law does not apply i.e., the government or highly placed individual are not subject to the laws, and the judiciary is not independent.
    3. The press is not free.
    4. Doing business requires payments to government officials or other highly placed individuals.
    5. The government is not elected in a freely democratic process.
  • Should the company arrange its legal structure to minimize taxes, ideally to pay no taxes?
  • Should the company lobby governments to change laws to reduce company taxation?
  • What would be your answers for the first three questions if the country in question was your home country, such as Canada? If your answers differ, why do they differ?

 Footnotes:

1 https://corpgov.law.harvard.edu/2018/01/17/a-sense-of-purpose/

What are your values and morals? Survey Tool

The following is a survey tool designed to gain individual perspectives regarding values and morals.  This tool can be adapted to a specific company situation.  The tool must be used by a trusted third party in order to maximize the chances of getting valid and confidential input.

The tool can be used anywhere in the company, from front line staff to the board of directors, or controlling shareholders.

I have suggested two decision-making values (making more money and career progression) because I’ve perceived these as very important to some people.

Identify the values and morals based on your complete life i.e. 24 hours a day.  Note any differences between your complete life vs your work life.  The last two columns are solely regarding your work life.  In terms of importance, its fine if more than one value has the same importance (e.g. three values are #1)

The survey collects the following information

  • What are the company’s documented values and morals, if any?
  • Which values and morals are used by your leaders and colleagues?
  • Which values do you believe are moral?
  • What are the most important values you use throughout the year to make decisions and guide your actions? Personal financial success and career progression may be some of these.
  • What are the differences between your values vs what you perceive to be the values of your colleagues and leadership?

 

Value and related decision making, actions, behaviours Is this value, decision making, action or behavior a “moral” characteristic? Which values are most important to you? (#1, #2) Which do you perceive as most important to your work colleagues? Which do you perceive as most important to your management?
 

 

 

 

 

 

Making more money
Career progression

Society’s trust in corporate leadership and political leadership is low.

  • Only 15% of Americans aged 18-29 believe “things in the nation are headed in the right direction”.
  • Only 1 country of 38 countries surveyed had a majority of people believing that representative democracy was the only way to govern a country. Only 44% of Canadians had this belief.  Sweden (at 52%) was the only country with a majority belief in democracy.
  • 80% of Canadian believe that “The elites who run our institutions are out of touch with regular people”.
  • 26% of Canadian believe a board of directors, 25% of Canadian believe a CEO.

You may click to download a one page PDF with more facts Low trust in leadership

You may contact me to obtain more detailed reports and more insight into the facts.

This document supports the discussion of  Why are values, morals, and ethics important?

 

U.S. Army Values

Many of your companies have statements regarding company values.  It would be interesting to compare your company’s values with the values of the U.S. Army.

Two question that arises immediately are:

  • What is the purpose of having company values?
  • What are corporate leadership and employees supposed to do with those statements of values?

Values – U.S. Army

The U.S. Army Values document supports the discussion of  Why are values, morals, and ethics important?