“In the next century, a company will stand or fall on its values,” Robert Hass, CEO of Levi Strauss was quoted to have said. I have sometimes used this quote to begin one of my lectures on corporate governance, saying that this statement has been validated by the humongous scandals and failures in the West – Enron, the mother of all f…k-ups, Worldcom, Tyco, even one of the big 5 accounting firms, Andersen, etc. in 2000, and repeated in 2008 with Lehman Brothers, Bear Stearns, AIG, US housing giants Fannie Mae and Freddie Mac, not the mention the big banks…all of whom had to bailed out (with the exception of Lehman) with taxpayers money. What indeed were the values espoused by these companies?

In discussing what corporate governance is about, I usually short-cut it by taking each of the elements in a definition I found very useful, that given by former World Bank President, James D. Wolfensohn: “Corporate governance is about promoting fairness, transparency, and accountability.” Transposing the letters to make an easy acronym, FAT, I have also added another letter to make FATE, with E representing Ethics.

Of course it could be said that observing FAT really means that underlying it all is the observance of E. If a company observes fairness, accountability, and transparency, then underlying it all, it must be ethical. FAT after all means that a good company assures that its shareholders are treated equitably, promotes long term value, and balances its profit motive with prudentially protecting its investments. FAT also means that in the relationships among the three important groups in a company – the shareholders, directors and management – each is accountable to the other, with the Board being accountable to the shareholders who own the company, and the Board being responsible for the actions of management which it appoints to implement its strategic and policy decisions. FAT also means that the Board ensures timely and accurate disclosure of all material matters, including material foreseeable risks, and requires a system of monitoring and reporting based on accepted standards of adequate disclosure.

So why add E for Ethics? My point in adding E is that because it is “understood” it tends to be taken for granted. And there are indeed specific nuances to observing ethical behavior in companies, as led by the Board, which, in the usual corporate governance mantra, sets “the tone at the top.” Hence an ethical Board will make sure its Management performs its daily tasks ethically, and shareholders have a right to expect such ethical behavior from those to whom they have entrusted their money. Was this ethical behavior observed by Enron? By Andersen? When these two – company and external auditor – had such a cosy, incestuous relationship?

How about AIG, who first thing they did with the government money infused to bail it out, paid scandalous bonuses to their top executives as shareholders watched in horror at what was happening to a company they trusted? We in the Philippines were actually affected: the reputation of Philamlife a long-respected insurance company was almost sullied, and its Philam Savings Bank, a small but excellently performing and high-standard bank had to be sold to raise money for the imprudent giant abroad. How about all those big banks and investment companies who merrily inveigled homebuyers who were not financially capable to borrow at rock-bottom interest rates, and then turned around and sold those exotic – and eventually toxic – instruments they called by the fancy name “derivatives” which turned out to be based on what we in tagalog call ampao? If all these later companies indeed observed the new stricter rules of Sarbanes-Oxley and NYSE, i.e., observed kuno, corporate governance, why then?

And that is why I stress Ethics in my discussions on corporate governance, notwithstanding that indeed it might be said that this virtue underpins the three basic norms of good corporate governance. What then is Ethics? What does it mean to behave ethically? Ethics, I believe, is about Integrity. It refers to honesty, uprightness, and upholding a Code of Ethics that expresses the basic values of a company. It is about right and wrong, and how an honorable person should behave. It refers to a standard of conduct that indicates how one should behave based on moral duties and virtues arising from principles of right and wrong. Ethics means that there is commitment to do what is right, good and proper. Ethics, to the Board (and Management), is about avoiding conflicts of interest which is part of their duty of loyalty to the company. And certainly, it is about character and courage and how to meet the challenge when doing the right thing will cost a lot more than one is prepared to pay.

And so when I emphasize ethics as an important commitment of the Board – which as an early 90’s definition of corporate governance says that it is “the system by which companies are directed and controlled principally by a Board of Directors” (Cadbury Report) – I am saying that the Board has the ultimate responsibility for creating a culture that promotes ethical practice and social responsibility throughout the corporation. And as we said, directors must ensure that the company’s goals, strategies, policies and practices are proper, legal, and above all moral. Otherwise, any director or the Board, must be prepared to resign. Tough? Of course it is difficult, but who said walking the straight and narrow is easy?

Since I began with a quotation, let me end with another one from a late nineteenth century French philosopher, Emile Durkheim:
“When values are sufficient,
Laws are unnecessary;
When values are insufficient,
Laws are unenforceable.”
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