FORUM: Engaging with stakeholders on long-term governance, ethics and cultural issues


Financier Worldwide Magazine

May 2018 Issue

FW moderates a discussion on engaging with stakeholders on long-term governance, ethics and cultural issues between J. Kevin Foster at Business Ethics Advisors, LLC, Juan Aguayo at Cuatrecasas, Simon Osborne at ICSA: The Governance Institute, Friso van der Oord at the National Association for Corporate Directors (NACD), and Melissa Sawyer at Sullivan & Cromwell LLP.

FW: In your opinion, how important are governance, ethics and cultural issues to businesses operating in today’s market? Do they typically rank high enough on the board agenda?

Foster: Governance, ethics and cultural issues are more important today than they ever have been. Customers, regulators and shareholders are demanding that corporate leadership places a high ethical bar on organisations’ cultures. For example, activist shareholders, like Blackrock, are insisting that boards be accountable for festering problems that could, and should, have been addressed at an earlier stage.

Van der Oord: Not enough consistent, proactive board attention has been paid to ethics and culture in the past. That said, we are now seeing increased focus on culture as a growth driver, not just as a source of liability, with boards recognising that behaviours now matter as much as business outcomes in a hyper-transparent world. The question is: how can the board effectively engage and assess the health of corporate culture? Today, ethics and culture hit many boards’ agendas when it is too late, often in response to an incident or even a crisis. However, leading boards are integrating culture into board discussions and decision making, for example when evaluating the CEO’s performance, selecting the next CEO or signing off on the next acquisition.

Sawyer: These issues already rank very highly on the board agenda, in large part because they have become a significant focus of institutional investors and proxy advisory firms in the last few years. However, for many boards there is a danger that their dialogue concerning these issues is being dominated by undifferentiated governance scorecards and checklists, when in fact these issues really have to be considered in light of the commercial context. In many cases, boards are working hard to reconcile the push for companies to adopt ‘market standard’ approaches on these issues to a particular company’s long-term strategy, size, industry and competitive positioning, which should all inform which ESG policies, practices and disclosures are appropriate for that company.

Aguayo: Governance, ethics and cultural issues are much more important for companies nowadays. Companies are facing a new context where clients and customers and, generally speaking, all stakeholders, are more demanding and want to avoid establishing relationships with parties that are not committed to good governance and ethics. While listed companies are one step ahead, non-listed companies are following the same path. Board members are aware of the risks associated with defects in governance and how these may impact investment decisions. Diversity and equal gender are particularly important topics right now. The visibility and speed of the dissemination of news through the internet influences the decision-making process, as well as organisational aspects. Consequently, a transparent and adequate communications policy regarding governance and ethics is crucial. In terms of how highly these issues rank on the boardroom agenda, for medium to large companies, they are in the top three, alongside finance and strategy. In smaller companies, sometimes they rank lower, but they are still considered important or very important.

Osborne: Trust in business is fundamental. If you do not trust the person with whom you are doing business, then that relationship is untenable. Culture and ethics are of paramount importance in developing trust and there is a considerable amount of focus, especially on culture, for many boards at this time. According to the Institute of Business Ethics’ ‘Culture Indicators: understanding corporate behaviour’ report, 82 percent of respondents surveyed said their boards monitored data related to culture. However, the survey also showed that boards pay little attention to some issues that might provide important insights on culture, such as customer complaints and exit interviews. This is a pity as the Financial Reporting Council’s ‘Corporate Culture and the Role of Boards’ report clearly demonstrates the importance that culture and good governance play in delivering long-term business and economic success. This is one of the main reasons why the FRC’s proposed revisions to the UK Corporate Governance Code cover issues such as integrity, corporate culture and listening to stakeholders. Boards that do not pay these areas sufficient attention will suffer in the long run. Business must earn its licence to operate in the market.

Risk mitigation is not an end unto itself. A board needs to balance the time it spends overseeing risks against the time it spends overseeing strategy.
— Melissa Sawyer

FW: To what extent can effective oversight of governance, ethics and cultural issues mitigate the broad range of corporate risks that an organisation faces?

Van der Oord: Ethics and culture cannot be separated from risk, as many risks are rooted in behaviours that deviate from corporate standards of conduct. A strong ethical culture can deter the bad behaviour of bad actors and prevent them from infecting their teams and even entire organisations. Effective oversight of ethics and culture can help boards spot early warning signs about behavioural breakdowns, for example through the use of culture surveys and careful evaluations of helpline reporting trends, which ultimately could snowball into significant risk exposures. Board vigilance over culture can help identify whether excessive risk-taking becomes a systemic problem across the business or if it is isolated to a small group. Moreover, in today’s environment, effective boards use an ethical compass when making or guiding decisions that affect business reputation and the ability to create long-term value.

Sawyer: Providing effective oversight of governance, ethics and corporate culture generally is the first line of defence against brand-damaging events, poor investor relations and, to some degree, poor economic performance. However, risk mitigation is not an end unto itself. A board needs to balance the time it spends overseeing risks against the time it spends overseeing strategy. The most effective boards are often the ones which select a CEO who will partner with the board to drive a good culture from the top, with the CEO taking on day-to-day responsibility for implementing the guidelines established by the board. The board can support the CEO in that endeavour by setting performance metrics for management incentive compensation that aligns with the board’s core principles of governance and ethics.

Aguayo: Experience shows that companies that have implemented governance and ethics to a high standard react better and faster if problems arise. An adequate reaction allows companies to preserve credibility vis-à-vis third parties, and then, to maintain market reputation. Companies are also becoming more aware of the availability of adequate control mechanisms and internal procedures, which are natural defences in the event of allegations. Also, from a preventive point of view, internal governance and ethics regulations are helpful to build and reinforce a values system throughout an organisation.

Osborne: Having good governance, sound ethics and a strong corporate culture can mitigate, but not obviate, the risk of things happening. You cannot avoid risks completely. Boards comprise human beings and board members, like all people, will make poor decisions from time to time. Many risks boil down to human behaviours. If strong corporate governance procedures are in place, it will be more difficult for people to do wrong, but you cannot necessarily stop those people who are determined to circumnavigate the rules. The solution is to have such a strong, ethical culture in place from the top to the bottom of the organisation that people simply do not wish to go against it.

Foster: The board is ultimately responsible for oversight and determining how risks are monitored. The most significant risk for a board is if the compliance function is not able to anticipate and identify risks at an early stage. The board must insist on a robust and independent compliance function that is fully supported at all levels of management. The board’s most fundamental responsibility is the hiring of the organisation’s chief executive who must execute the will of the board. The CEO must bring all of the company’s management together to align organisational activities to address the risk profile of the organisation.

Ethics and culture cannot be separated from risk, as many risks are rooted in behaviours that deviate from corporate standards of conduct.
— Friso van der Oord

FW: To what extent is the implementation of governance, ethics and cultural best practice across an organisation a matter of resource availability and management strategies and priorities?

Sawyer: Implementing governance, ethics and cultural best practices can be expensive. For example, the ‘start-up costs’ for catalysing new practices may include additional layers of non-revenue-generating headcount, such as legal, compliance and HR employees. Importantly, however, many companies find that once they have made an upfront investment in shaping their practices on these matters, they see immediate returns in the form of better employee retention, reduced legal expenses and better governmental and stakeholder relationships. In many cases, they also find that their expenses go down after the initial implementation phase because cultural shifts occur and adoption of the new practices becomes more innate.

Aguayo: Companies are concerned about costs, and implementing high standards of governance and ethics requires internal and, sometimes costly, external resources. While awareness of governance and ethics is important across any type of company regardless of its size and economic and financial situation, in some respects it is an easier task for medium or large companies. In general, a higher level of organisation in larger companies makes it possible to internally allocate governance and ethics controls and responsibilities, without necessarily incurring further costs. It is true, however, that smaller companies that are tightly governed may have smaller needs and thus may require a relatively lower investment to ensure adequate governance and ethics.

Foster: Resource availability does not seem to be the issue as much as management strategies and priorities. Organisations that are fully committed to exceptional governance, ethics and cultural best practice will make the resources available to implement the right programmes. Executives are noticing that those organisations that skimp on compliance investments regret it when issues are exposed. Accordingly, organisations are being forced to accept the importance of best practices because the costs of not doing so have become so high.

Osborne: It is a matter of the will of the board and the senior executive team. If everyone at the top of the organisation says ‘this is what has got to happen’ it tends to happen. That said, unless a board and the senior executive team embody the values and behaviours they are trying to enforce, the rest of the organisation is unlikely to follow suit. The board needs to live, and be seen to live, by the values they espouse. If good governance, ethical behaviour and positive culture are genuinely led from the top, by osmosis they form part of a company’s fabric and become embedded in strategy and priorities.

Van der Oord: In the US, the term ‘governance’ describes the work and structure of the board rather than of the organisation. So ‘governance’, by definition, occurs at the board level. With an independent chair or a lead director, assisted by an able general counsel or corporate secretary, boards generally deliver effective governance. However, it should be noted that regulatory and investor expectations for good governance are constantly rising, making it critical for boards to continuously adapt their governance models. The implementation of ethics and culture best practice certainly demands strong and consistent commitment from management, as reflected in the organisation’s strategy, vision and mission. But adoption of these best practices is still not guaranteed, even if sufficient resources are available. A holistic, structured approach is needed. Companies and their boards should recognise that ethics and culture are often the outcome of ever-changing strategic intentions, organisational structures, incentives, performance management systems, operational processes and leadership styles.

FW: How important is it to optimise interaction between stakeholders in a company, to drive governance issues forward and build an ethical culture?

Aguayo: On the one hand, all companies have a differentiated culture, whether this is perceived or not by third parties. On the other, and strictly speaking, ethics is not a choice, but a compulsory set of values. Each company needs to stress the values that showcase its culture. To the extent that companies make the effort to collect and set out these values as appropriate, this differentiated culture will be better preserved and may be easily conveyed to stakeholders and any third parties. Interaction with stakeholders is a real need. The market is out there and companies are focused on the market when selling goods or promoting their services. For the same reason, companies should look at stakeholders as part of their communities. The point is where the limits of the interaction are. Companies should consider stakeholders’ legitimate interest but, basically, the decision-making process should preserve medium and long-term sustainable creation of value for shareholders in compliance with the law. This should give enough room for considering stakeholders’ interest, while preserving adequate decision making at the level of company ownership.

Osborne: It is important that companies have a clear understanding of the views and priorities of stakeholders. However, although the directors of a company have a statutory duty to pay regard to the interests of stakeholders, these do not take priority over the interests of members. Ethical culture is dependent on the board and the senior executive team leading from the top. If a company is clear about what it expects from employees, suppliers and the various other stakeholders with whom it interacts, it is easier to embed an ethical culture. This is the same for good governance. If everyone understands the value of good governance, and the board demonstrates a clear regard for it, then other stakeholders are more likely to be willing to implement the necessary processes and practices to ensure that it is effective.

Van der Oord: In the US, under state law, directors are fiduciaries on behalf of the corporation and all its stakeholders. These stakeholders include shareholders, bondholders, creditors, employees, customers and communities – including, for very large public companies, the general public. In the US, the burden on the board is not to optimise interactions among stakeholders. Rather, it is to mediate the sometimes conflicting interests of these different groups, provide due attention to stakeholders’ issues of importance and ensure transparent communication to stakeholders. Optimisation of interactions among stakeholders will occur naturally under these conditions. Secondly, if we define governance as the structure and work of the board, this too will occur naturally.

Foster: Executives must seek to integrate governance and ethical best practices at every opportunity so that all levels of the organisation know that their ‘best’ is expected of them. Also, management must personally fully adopt the ethical culture in order to set a shining example. Anything less should not be tolerated by the board, lest lower levels of the organisation think that the words are meaningless.

Sawyer: Companies have a lot of different stakeholders, including investors, customers, vendors, employees and regulators, and their communications with those stakeholders must be informed by the commercial context of the relationship. For example, companies’ communications with their investors about governance issues are very important for defining best practices and the investors’ view of factors that may affect long-term performance. In the past few years, investors have been instrumental in shaping the dialogue around important issues like gender diversity on boards and climate risks. However, in optimising these interactions, it is important for all investors to be given the opportunity to have a voice, whether they be short or long-term investors, ‘longs’ or ‘shorts’, active or passive, or institutional or retail. In addition, companies need to balance the benefits of enhancing the frequency and transparency of communications with stakeholders against the concomitant risk of distraction from operational activities designed to increase total shareholder return. While seemingly epitomising the ideals of shareholder democracy, requiring boards to constantly take the temperature of investors prior to making decisions defeats the purpose of interposing a board between the shareholders and management.

Open, honest discussions at board level and below lead to more effective decision making, and this is vital to a company’s success.
— Simon Osborne

FW: How important is it to support an open culture within a corporate environment, where ethical considerations are actively encouraged and stakeholders have an opportunity to voice values-driven concerns about potentially problematic practices?

Van der Oord: Cultivating an open culture where employees feel comfortable or even encouraged to speak about alleged misconduct or other problems is critical, and boards have a responsibility to evaluate whether such a culture has taken root and is sustained. But many companies still have a way to go. We know from a recent Ethics & Compliance Initiative survey, globally, there is still a significant gap between those employees observing alleged misconduct and those comfortable reporting it to the helpline or another channel. Our ‘2017-2018 Public Company Governance Survey’ also revealed a serious culture awareness gap on many corporate boards. Eighty-seven percent of directors report that they have a good understanding of their companies’ tone at the top, but this number drops significantly when looking at the mood in the middle and on the frontlines – organisational levels where culture can enormously impact the wrong or right employee behaviours.

Foster: It is tough to monitor risk if feedback from the people on the frontlines is not encouraged. Risks are continually changing. And changing risks brings changing attitudes of what is ethical and what is not. What was acceptable within our culture is different today than it was even a few years ago. Organisations need their diverse set of stakeholders to act as a beacon for any adaptation that the organisation requires for staying current. Accordingly, investors are demanding more diversity of experience and backgrounds on boards to provide new and different perspectives.

Sawyer: A culture that fosters transparent reporting of problematic practices is always desirable, so that management and the board can quickly take action to fix issues. However, companies need to establish thoughtful processes and procedures to handle whistleblower reports so that they can weed out spurious claims and surface real problems effectively. In addition, while stakeholders should certainly have a voice about ethical considerations, as well as matters that affect the performance of the corporation, it is less clear that a corporation is the right forum to give stakeholders a platform to advocate for social policies that are the subject of current political debate and that are not material to or directly related to the corporation’s businesses. For that reason, there always needs to be a balance between those matters that are appropriate for the board and management to decide, and those matters that other stakeholders should be able to drive.

Osborne: If people have concerns that a company is not actually living by the values or culture that it claims to have in place, they should be able to report this through an independent and confidential whistleblowing process. Employees and other stakeholders should be encouraged to voice concerns as they arise so that they can be dealt with in a timely manner. If, for example, a chief executive is acting in a ‘do as I say, not as I do’ manner, then it is up to the board to manage this so that a positive culture can be cascaded through the company. Open, honest discussions at board level and below lead to more effective decision making, and this is vital to a company’s success.

Aguayo: Isolation is not an option. Companies should hear and understand and be able to make adequate judgements and well-founded decisions. This requires effort by an organisation and vis-à-vis third parties.

Each company is different. Needs and goals thus vary. Although precedents and standards are always good to look at, specific needs require a case-by-case analysis.
— Juan Aguayo

FW: What advice would you offer to organisations on implementing policies and procedures to enhance governance, ethics and culture?

Osborne: Ensure that the processes and procedures are supported from the top of the company, with executive and board support. I would also emphasise the importance of boards appointing a properly qualified company secretary or governance professional to support them. They are critical to board performance and good governance practice. Boards should heed their advice and value their expertise. Company secretaries have a raft of governance knowledge at their fingertips and are the people at the boardroom table with the most experience in implementing governance frameworks and ensuring that companies behave ethically and in line with corporate culture.

Sawyer: Context matters. It is easy to benchmark yourself against governance checklists and ‘best practices’ that peer companies are following, but it is also critical that the board engages with management to debate whether those ‘best practices’ will actually work for that organisation.

Foster: People must understand the ecosystem of risks in their operating environment. Policies and procedures must be reviewed annually for this changing risk. Furthermore, Big Data is becoming increasingly important as a defence against regulatory and investor scrutiny and plaintiff litigation. Organisations need to implement policies and procedures to harness data to support the organisation’s reputation when questioned. While implementing enhancements to policies and procedures is critical, people tend to ignore what they do not understand. Therefore, training is vital to bring ethics to a personal level.

Aguayo: Each company is different. Needs and goals thus vary. Although precedents and standards are always good to look at, specific needs require a case-by-case analysis. There are a number of services providers in the market offering standard packages with minimum adaptation. It is a cheap option that in most cases becomes unuseful. Each organisation has different needs and requires different work to achieve them. Another important issue is time. Good governance, ethics and culture require assimilation within an organisation. In many cases, a good strategy to enhance governance, ethics and culture is progressive adaptation.

Van der Oord: The design of new policies and procedures matters a great deal in the modern, fast-changing, often far-flung corporation. They must be baked into the company’s operations and employees’ daily decisions. Balanced incentives, education on realistic scenarios to help apply policies, local supervisor training and transparency about the consequences of bad behaviour are all critical elements of a dynamic ethics programme in leading businesses.

We are already seeing more companies take a proactive approach to governance, ethics and cultural dynamics.
— J. Kevin Foster

FW: Going forward, do you expect companies to more proactively address governance, ethics and cultural dynamics within their organisation? What are the consequences for those who demonstrate indifference?

Sawyer: Most companies are already proactive about considering governance, ethics and cultural dynamics. The challenge they face is that their stakeholders’ perspectives on what represents best practices, and the metrics around what practices actually deliver the desired results, are constantly shifting. Moreover, at some point in their history, all companies face challenges in adhering to the high standards they set for themselves. In this sense, governance, ethics and culture are no different to financial performance. What is important is that companies assess their achievements honestly and strive to do better.

Foster: We are already seeing more companies take a proactive approach to governance, ethics and cultural dynamics. A recent Accenture PLC survey of 150 compliance executives at financial services institutions found that 89 percent of respondents expected to increase their compliance investments over the next two years, with most stating that the new investments will be in technology transformation. Technology investments make sense as the survey respondents indicated that cyber, data and information and privacy risk were their top risk concerns. Those companies that do not proactively address these risk concerns have a higher chance of reputational and legal risk.

Aguayo: We see a strong trend on these issues moving forward. Those companies that demonstrate indifference will be negatively judged by consumers and clients, as well as stakeholders. In the case of listed companies, proxy advisers and institutional investors are looking at these issues more. The shareholders directive imposing disclosure on the voting policy of certain investors is an example of what the current expectations are. Another relevant angle is the difficulty in attracting talent and hiring the best employees. Companies indifferent to governance, ethics and culture matters will suffer.

Van der Oord: Companies will increasingly invest in ethics and culture as drivers of performance, not just as risk mitigation strategies. Culture in today’s business environment may have become the ultimate competitive differentiator, as everything else in business can be replicated and commoditised. We have squarely entered the era of behaviour where, according to leading ethics guru Dov Seidman, how you conduct yourself as a business matters as much as what you do or how much you grow. Culture is not only critical to prevent bad behaviour, but it can also be a major catalyst to enable positive results. If led and managed well, culture is the rocket fuel for delivering value to stakeholders. The companies that do not fuse culture and performance will fall behind, as they cannot compete for talent, cannot change fast enough and cannot maintain brand value.

Osborne: A focus on governance, ethics and a positive workplace culture is of increasing importance to investors and so we would fully expect companies to increase their efforts in these areas. Companies that do not behave ethically run the risk of alienating investors and stakeholders and that does not lend itself to a sustainable business model. The UK already has one of the strongest records in terms of corporate governance, with the UK Corporate Governance Code duplicated or used as the basis for other governance codes throughout the world. The revisions that are currently being worked through seek to enhance this reputation and we expect companies will continue to proactively address governance, ethics and cultural dynamics.



J. Kevin Foster is the chief executive of Business Ethics Advisors, LLC. He is an expert on ethics and compliance. Mr Foster speaks and conducts workshops on the importance of bringing ethics to a personal level to limit criminal liability within an organisation. He is a summa cum laude graduate of Spring Hill College, Mobile, Alabama with a double major in accounting and history. Mr Foster’s professional experience includes Peat, Marwick & Mitchell (now KPMG), Dr Pepper, FDIC/Division of Liquidation, Standard Chartered Bank and Marcus & Millichap. He can be contacted on +1 (770) 715 2095 or by email:

Juan Aguayo is a corporate M&A lawyer specialising in transactions involving equity capital markets, such as securities offerings and issues, and takeover bids. He has participated in important transactions involving IPOs, distressed public M&A, and structural changes to listed companies, as well as complex restructuring and investment transactions led by international funds, including alternative investment funds. He has designed the corporate governance of some of the largest Spanish listed companies. He developed part of his career in London. He can be contacted on +34 (915) 247 806 or by email:

Simon Osborne is the chief executive of ICSA: The Governance Institute and joint head of ICSA Board Evaluation. An ICSA Fellow, Mr Osborne has over 40 years’ industry experience and is a member of the International Corporate Governance Network (ICGN). A solicitor by background, he had a lengthy career in the railways industry as group legal director, group secretary and general counsel at Railtrack Group PLC and head of legal at the British Railways Board. He can be contacted on +44 (0)20 7612 7001 or by email:

Friso van der Oord is director of research at the National Association of Corporate Directors, where he is responsible for all content development. He is an experienced governance adviser and business line manager, who has worked with Fortune 500 and global executives on major risk, compliance and integrity challenges, serving in leadership roles at CEB and LRN over the last 15 years. He currently represents NACD as a member of the Oversight Council of the International Professional Practices Framework developed by the Institute of Internal Auditors. He can be contacted on +1 (571) 367 3617 or by email:

Melissa Sawyer is a partner in Sullivan & Cromwell LLP’s M&A group and is co-head of the firm’s corporate governance and activism practice. In addition to advising clients on public and private M&A transactions, joint ventures and strategic alliances, she also regularly advises clients on corporate governance, activism and takeover defence matters. Ms Sawyer’s experience spans multiple industries, including consumer and retail, industrials, MedTech and insurance. Ms Sawyer has been repeatedly recognised as a leading M&A adviser, including by Chambers, The American Lawyer, Crain’s and Law360. She can be contacted on +1 (212) 558 4243 or by email:

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