For effective governance, an organisation must ensure its internal control mechanisms have strong ethical backing.
It is common belief, predicated on several instances of companies that suffered severe financial problems and eroded the wealth of the shareholders, that governance failures result from a paucity of “tone at the top”. The “tone at the top” refers to the behaviour of an organisation demonstrated by the quality of its financial accountability, which, in turn, is a function of the behavioural attributes and idiosyncrasies of the principal shareholders, the chairman and the board of directors and the management.
This argument has obviously strong underpinnings of ethics, for, otherwise, examples of criminal organisations would show that effective and durable organisations could exist even totally bereft of any conventional ethical values. A lesson needs to be learnt from the functioning of these “ethicless” organisations. They “inhabit dynamic environments where the pressures of competition and state opposition constantly challenge their very existence”. But these organisations survive and prosper. Moreover, they show resilience in adapting to changing environmental conditions, expansion or contraction of illegal markets, new technologies and internal conflicts*.
What drives the effectiveness of these organisations is a system of highly effective checks and balances and internal controls that has been in place since the inception of the organisation, and which is refined through continuous re-examination and introspection. Survival is the reason they do this.
The above points and counterpoints posit several questions. One, which factors are critical to the effectiveness of an organisation’s governance process? Two, is the tone at the top sufficient to ensure effective and ethical governance, or is it a necessary condition, because even the “ethicless” organisations have a “tone at the top”? Three movies, Godfather I and II, and Sarkar, show that the “tone at the top” changes with a change in leadership.
Perhaps less starkly in today’s “New Hard Times”, if the tone from the top to the CFO is that the quarterly numbers must be met or the company will find someone else to do the job, then the CFO would necessarily have to pass on the message to the team, which has little choice.
So the “tone at the top” does matter; but the quality and timbre of the tone matter more. A dichotomy in the “tone at the top”, resulting from a lack of consistency and the gap between perception and reality, creates an aberration in the quality of the timbre. There are examples of companies in which many top corporate executives and directors responsible for the quality of accountability are not often what they want the public to believe they are. Former WorldCom CEO Bernard Ebbers, who was convicted in March 2005 on nine counts of fraud, had always maintained: “You’ll see people who in the early days … took their life savings and trusted this company with their money. And I have an awesome responsibility to those people to make sure that they’ve done right.” But the WorldCom leadership team did not believe his statement, since it was intended to satisfy Wall Street and earn kudos from the media. Adelphia founder John Rigas, convicted in February 2005 on 18 counts of fraud, publicly stated that “it’s more than just dollars. You’ve got to give back to the community that supported you”. Enron CEO Jeffrey Skilling, who used to keep Richard Dawkin’s book Selfish Gene on his table, professed in Enron that he believed “people have an obligation to dissent in this company”. But he had instituted an HR system of “rank and fire” to weed out any dissent and underperformance; it came to be known as the rank and yank system. The wide gap between the publicly announced tone at the top and the actually observed ethical values within the organisation suggests the inappropriateness of relying only on the tone at the top. It also creates confusion among those who are to carry out the orders.
Henry II and Thomas Beckett were friends, who were clashing over their roles as King and Archbishop. Henry wanted to rule the English Church; Beckett was doing all he could to stop that. This was known to Henry’s men. So when Henry II said, maybe in frustration or maliciously, “Will No One Rid Me of this Meddlesome Priest?”, it set the tone for the four knights who overheard him. They murdered Thomas Beckett.
The effectiveness of any governance process, whether of the state or of a company, is dependent on the behavioural effectiveness of those who govern and manage. Governance often fails because more effort is devoted towards creating and sustaining structures and processes, while little meaningful attention is given to institutionalisation of behavioural and ethical accountability, which are the guardians of organisational integrity. The fulcrum of the quality of corporate performance is the quality of behavioural performance and accountability of the board and the management. The common factor that cuts across all cases of corporate malfeasance resulting in financial distresses is the misuse of financial accountability, demonstrated through cooked accounting figures, to deceive the investing public – often with the connivance of the media – into believing that the organisation is being run well. In such cases, while robust pictures of corporate performance of an organisation are painted, the internal control mechanisms of such an organisation are eroded by corporate executives and directors with very little behavioural accountability. When that happens, it is possible that the state of Denmark could become “an unweeded garden” of “things rank and gross in nature”.
When there is a sound ethical tone at the top in an organisation, it permeates and inspires the organisation. The same is true of the governance of the state and the governance of its political and economic institutions. It must, however, need to be supported and enforced by a strong system of checks and balances, which, in times of temptation, would act as an effective bulwark against the proclivity and predilections of those inclined to stray. The structures, processes and systems of internal controls are important. Behavioural governance breathes life into them by building into them patterns receptive to genuine corporate accountability, corporate justice, transparency, genuine disclosures, accounting processes that have integrity and a genuine foundation of high performance, as opposed to cooked performance. Our regulators would do well to keep that in mind while administering the regulatory framework for governance.
*International Journal of Law, Crime and Justice 37, 2009
The author is former executive director of Sebi and is currently associated with the IFC’s Global Corporate Governance Forum of the International Finance Corporation and the World Bank. These views are personal
