1

Ethical leadership – The key to understanding King III

CIS Corporate Governance Conference

Sandton Convention CentreJohannesburg

10 September 2009

Willem A LandmanEthics Institute of South Africa (EthicSA)www.ethicsa.orgwillem@ethicsa.org

Introductory remarks – Ethics and King III

Principle 1.1 – Ethical leadership by board

Principle 1.2 – Board and company as responsible corporate citizen

Principles 1.3 – Board and effective ethics management

3

Ethics vocabulary

• Ethics– Values-based conduct– Discretionary decisions grounded in values

• Values– Standards/norms for good, right and fair conduct– Examples: respect, integrity, responsibility, accountability, fairness

• Compliance– Rule-based conduct (following laws, regulations, rules) – Ethics codified

• Ethical dilemma– Values clash

• Ethical reasoning– Using values-based reasoning to solve ethical dilemmas

4

Making an ethical decision

An “Ethics Quick Test”1. Is it legal?2. Do my organisation’s Code of Ethics/Conduct and

other policies allow it?3. Do my professional standards allow it?4. What would my ethical role model do?5. How would it look on the front page of tomorrow’s

newspaper?6. How does it make me feel?7. Would I be comfortable sharing my decision with my

closest family?8. Does it pass the Golden Rule test?

5

Ethics in all human activities

Personalrelations Education

Politics

Organisations

Science

Religion

Professions — Law,medicine, accountancy, etc

ETHICSSport

Animals and naturalenvironment

Art

6

Ethics in all aspects of business

• Business ethics – The application of ethical values to organisational behaviour– Boardroom strategies and control– HR, IT, technical– Product development– Sales and marketing– Accounting practices– Relationships with agents, suppliers and

customers (stakeholder relations)

7

King III – “Stakeholder triple context approach” to corporate governance

QUESTION 1To whom is the board

responsible?

QUESTION 2For what is the board

responsible?

All stakeholdersStakeholder (vs shareholder)model of corporate governance

Triple context performanceand reporting

•Economic•Social•Natural environment

8

Relationship ethics/governancein King III

• “Ethics of governance”– Ethics is the reason for

corporate governance and the King reports

– Every aspect of corporate governance is grounded in ethical values

• Board responsibilities• Risk management• Internal audit• Sustainability

• “Governance of ethics”– A company’s ethics

performance needs to be actively governed and managed

– By means of a ethics programme

Introductory remarks – Ethics and King III

Principle 1.1 – Ethical leadership by board

Principle 1.2 – Board and company as responsible corporate citizen

Principles 1.3 – Board and effective ethics management

• Principle 1.1:– “The board should provide

effective leadership based on an ethical foundation.”

Ethical leadership

• “Ethics of governance”– Corporate governance requires that the

company is run ethically through effective ethical leadership

• Strategic direction – Board sets tone at the top• Control – Board delegates operational aspects of

ethics management

• “License to operate”– Company earns approval from all its

stakeholders

Ethical leadership

• Ethical leaders– Set the tone at the top– Make ethics explicit– Legitimise ethics discourse– Are ethical role models– Encourage ethical conduct in others– Hold others accountable for the ethics of

their conduct

“Ethics of governance” — Ethical values (“RAFT”)

1. Responsibility– Board responsibility for company’s assets

2. Accountability– Board able to justify its decisions

3. Fairness– Board considers interests of all stakeholders

fairly

4. Transparency– Board discloses information in manner that

allows for meaningful analysis of the company’s actions

14

“Ethics of governance” — Ethical duties of directors/leaders

1. Conscience– Intellectual honesty; avoids conflict of interest;

independence of mind

2. Care– Devotes serious attention to affairs of company;

acquires all relevant information needed for effective control and direction

3. Competence– Has knowledge and skills; develops competence

4. Commitment– Diligent in performing duties

5. Courage– Courage to take risks associated with directing a

successful sustainable enterprise and to act with integrity

Introductory remarks – Ethics and King III

Principle 1.1 – Ethical leadership by board

Principle 1.2 – Board and company as responsible corporate citizen

Principles 1.3 – Board and effective ethics management

• Principle 1.2:– “The board should ensure that

the company is and is seen to be a responsible corporate citizen.”

Responsible corporate citizenship

• Company as collective citizen, analogous to natural person

• Discharges duties in manner sensitive to triple context– Economic– Social– Natural environment

• In South Africa it means that company builds trust by respecting rights– Universally recognised human rights– Constitutional rights

Introductory remarks – Ethics and King III

Principle 1.1 – Ethical leadership by board

Principle 1.2 – Board and company as responsible corporate citizen

Principles 1.3 – Board and effective ethics management

• Principle 1.3– “The board should ensure that

the company’s ethics is managed effectively.”

20

“Governance of ethics” — The ethical challenges

• Proactive: Building– Trust– Reputation

• Defensive: Preventing– Fraud, corruption, theft– Cartels, insider trading– Conflicts of interest

21

2.2 Develop ethicalstandards

(code and policies)

2.1 Assessethics

risks andopportu-

nities

1. Buildethicalculture

2.3 Integrateethical

standards(ethics code)

2.4 Monitor, reportand disclose

22

Ethics in organisations ― A statement

• “Ethics is not an optional add-on to ‘normal’ business, nor it is a ‘soft’ issue. All business strategies and operations have an ethical dimension that we cannot escape — as we cannot escape our own shadow. Ethics holds enormous risks for companies, but ― more importantly ― creates reputational and competitive opportunities.”