The Nexus Between Good Corporate Governance and Business Ethics

1. REVITALISING THE AUDIT COMMITTEE – A STRATEGIC
PRIORITY IN AN UNCERTAIN ECONOMIC
ENVIRONMENT
Title of Paper:
Improving Organisational Governance and
Ethics
Caribbean Association of Audit Committee Members Inc.
CAACM’s
8th Annual General Meeting & Conference, 10th-11th July, 2014
Hilton Hotel, Port-of-Spain, Trinidad and Tobago
By Vindel L. Kerr, DBA

2. OUTLINE
1. Why Governance and Ethics now more than ever?
2. The Inextricable link between the Audit Committee and
Organisational Governance and Ethics
3. Legal vs Ethical Duties of the Board of Directors. Can they
be reconciled?
4. Board’ Role in Developing and Preserving the Governance
and Ethical Frameworks of an Organisation:
 The Corporate Governance Code
 The Code of Ethics and Business Conduct
5. Conclusions/Suggestions
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3. WHY ORGANIZATIONAL GOVERNANCE
AND ETHICS NOW MORE THAN EVER?
 The proliferation of financial crises has been a
particularly severe wake-up call, because it has
adversely affected employment, consumer
spending, pensions, the finances of national and
local governments and the global economy.
 These crises are manifestations of several
structural reasons why corporate governance has
become more important for economic
development and a more significant policy issue
in many countries.
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4. WHY….IN THE CONTEXT OF THE
CARIBBEAN PUBLIC SECTOR
Corporate Governance and Ethics are more important now than
ever for the following reasons:
 There is a dearth of empirical literature in Corporate
Governance
 Inadequate Corporate Governance Structures and
Practices
 Weak and Underdeveloped Regulatory Frameworks
 Systemic Weaknesses in the in the Financial Sector
 The prevalence of Corporate and Political Corruption
Source: Vindel Kerr Thesis (2010), Manchester Business School, England
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5. Among these are the following additional
compelling realities:
 The globalization of financial markets and the
commodification of capital
 Trade liberalization
 Complexity in the allocation and monitoring of
capital by International Financial Institutions
 Increase in international financial integration
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6.  Therefore, in sum it can be argued that the
introduction of corporate governance and ethics
has been generally motivated by a desire for
greater transparency, accountability,
probity, elimination of public sector
corruption, adjustment of regulatory
systemic weaknesses and increase investor
confidence in the stock market as a whole.
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7. THE INEXTRICABLE LINK BETWEEN THE
AUDIT COMMITTEE AND ORGANISATIONAL
GOVERNANCE AND ETHICS
The Audit Committee
This committee was invented with the purpose of monitoring
the integrity of financial statements and the internal
financial control systems. Its scope has long been extended to
that of providing an enterprise-wide approach to the review of
not just financial statements and internal control systems
(policies, procedures, processes, fit-and-properness of persons,
risk management, inter alia), but assesses independence,
objectivity and fairness in organisational decision making. In
essence, the modern role of the Audit Committee is to ensure
transparency, accountability, probity, equity and ultimately,
value-for-money.
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8. AUDIT COMMITTEE (CONTD.)
 It is the structure of the Board that assesses the
performance of the organisation and presents regular
and period updates to the Board of Directors
 It presides over the recruitment of the external auditors
and makes recommendations to the Board for removal
 To perform its duties effectively, international audit
conventions have specified minimum standards for its
membership, skill, experience and qualifications
(training) of members, its relationship with the BOD,
whistle-blowing, and role in external shareholder
relations
See Sir Robert Smith Report (2003), Financial Reporting Council, UK
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9. WHAT IS CORPORATE GOVERNANCE?
 Corporate governance refers to the set of laws,
regulations and voluntary principles, practices and
processes (a mixed of the ‘hard’ and ‘soft’ laws) by
which a company is governed. They provide the basis
as to how the company is directed and controlled such
that it can fulfill its goals and objectives in a manner
that adds value to shareholders and stakeholders over
the long-term.
 The Board of Directors have ultimate and overarching
responsibilities for an organisation’s corporate
governance system, and is the sole body and authority
to whom the Chief Executive Officer reports and is
accountable.
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10. 01/07/2014
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CORPORATE
GOVERNANCE
SYSTEM
Ethical
Standards
Accountability
Vigilance
Internal
ControlTransparency
Strategic
Direction: Vision,
Mission &
Strategy
A Basic Corporate Governance System

11. The Board as the Fulcrum of Organisational
Ethics and Governance:
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The Board
of
Directors
Vision,
Mission &
Strategy
Performance
& Reward
Systems
Balancing
Stakeholders’
Interests
Governance
and Ethics
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12. WHAT IS ETHICS?
 Ethics is the branch of philosophy that is
concerned with the rules, guidelines and
principles that underpin the decisions that people
make in any given aspect of their lives.
 Ethics therefore embodies concerns with the
determination of what is right or what is wrong.
Noel Cowell, Archibald Campbell, Gavin Chen and Stanford Moore (eds),
Ethical Perspectives for Caribbean Business (Arawak 2007)
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13. LEGAL VS. ETHICAL DUTIES OF
DIRECTORS.
CAN THEY BE RECONCILED?
 Section 99 (1) (a) of the TT Companies Act states
that directors and officers have a duty to act
“honestly and in good faith with a view to the best
interest of the company.”
 Section 99 imposes legal duties on the directors, but
from these duties, one can clearly see ethical duties
breaking the surface such as care, honesty and
loyalty, which are two key ethical duties which would
ultimately lead to the success of any company.
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14.  Section 99 1(b) of the TT Companies Act states:
1) Every director and officer of a company shall in exercising his powers
and discharging his duties—
(b) exercise the care, diligence and skill that a reasonably prudent person
would exercise in comparable circumstances.
o In Re: City Equitable Fire Insurance Co [1925] Ch 407, Lord Justice
Romer stated that the duty of care and skill involved three basic
elements: competence and skill in conducting the company’s affairs,
diligence and devotion to those affairs and the proper delegation of
their duties.
o John Stuart Mill, posited under the Utilitarian Theory that an act or
action is proper if it produces more positive consequences for the
majority.
o Section 99(1)(b) which states that Directors must take into account
the interest of Shareholders and Employees therefore impliedly
encompasses an ethical duty as stipulated by Mill to ensure that
Directors’ actions are beneficial to the majority of the stakeholders.
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15. Some Considerations for Boards in shaping an
The Ethical Framework of An Organisation:
Firstly, an ethical framework is built by people
interacting within an organization but most see
leadership (The Board) as a crucial factor. Some
institutionalized procedures, events or practices can
also contribute to shaping organizational cultures.
1. Leaders’ moral behaviour- Leaders communicate
beliefs and values but above all they are role models.
Thus, ‘leading by example’ is perhaps the most
important factor reinforcing the merits of an
organization ethical framework.
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16. SOME CONSIDERATIONS…(CONTD.)
2. Corporate mission, vision and values- Well-
defined Mission, Vision and Value Statements can
convey clear messages to organization actors when
accompanied by a serious commitment to
implement such statements
3. Ethical criteria for recruiting, selection
and promotion- if culture depends on people, it is
relevant to consider ethical criteria and virtues in
recruiting, selecting and promoting people in the
organisation
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17. 4. Applying ethical values to decision-making-
An ethical framework is shaped by consistent incorporation of
corporate ethical values into strategic decision-making, and
into the corresponding goals, policies and programmes
5. Ethics in both the formal and the informal
organization- Integrating ethical criteria into intra-
organization procedures and structures- and particularly
personnel policies and practices- is another way to bring
ethical values into everyday routine
6. Ethical criteria in customer relations- If
customer relations are permeated with ethical values this can
promote trust amongst customers which would in turn
strengthens the company’s reputation.
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18. 18
DIMENSIONS OF EXECUTIVE ETHICAL
LEADERSHIP
Moral Person: Moral Manager:
(leader’s behavior) (directs followers’ behavior)
- Traits - Role Modeling
honesty, integrity, trust visible ethical action
- Behaviors - Rewards/Discipline
openness, concern for people, holds people accountable
personal morality for ethical conduct
- Decision-making - Communicating
values-based, fair conveys an “ethics/values”
message

19. 19
EXECUTIVE ETHICAL LEADERSHIP
REPUTATION MATRIX
Weak Strong
Strong
Weak
Moral Person
Moral
Manager
Hypocritical Leader Ethical Leader
Unethical Leader
Ethically neutral (silent) leader ?

20. The Roadmap to Improving Organisational
Governance and Ethics
 Two Critical Approaches:
1. Developing and Operationalising a
Corporate Governance Code
2. Developing and Operationalising a Code of
Ethics and Business Conduct
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21. THE CORPORATE GOVERNANCE CODE
Delineates Best Practices (principles, practices and
process) in effectively carrying out its wider
mandate of legal duties and responsibilities and
managerial leadership oversight.
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22. KEY ELEMENTS OF A CORPORATE GOVERNANCE CODE
(Put Model Here: Vindel )
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•Policy
•Stakeholders
•AGM
•Annual
Calendar
•Business
Continuity
•Succession
Planning
•ERM
•Strategic
Planning
•Chairmanship
•Membership
•Quorum
•Preparation,
•Attendance,
•Participation
•Minutes
•
•TOR
Governing
Laws
•Selection &
Appointment
•Structure &
Composition
•Training
•Accountabi-
lity
•Compliance
•Ethics Code
Board
Opera-
tional
Manual
Meeting
Manage-
ment &
Dynamics
Stake-
holder
Relations
Govern-
ance and
Ethical
Frame-
works
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23. TOWARDS A CODE OF ETHICS AND BUSINESS
CONDUCT
 What is it?
 Its Purpose
 Case Illustrations
 The Code of Ethics
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24. WHAT IS A CODE OF ETHICS?
 A code of ethics is a corporate document that
develops the core values and the guiding
principles of a firm. It specifies criteria and rules
for the correct handling of business dilemmas,
issues or situations in which it is considered
particularly important that managers and staff
follow certain procedures approved by the firm’s
management.
Domènec Melè, Business Ethics In Action: Seeking
Human Excellence in Organizations (Palgrave Macmillan 2009)
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25. WHAT IS THE PURPOSE AND
IMPORTANCE OF A CODE OF ETHICS?
 A Code of Ethics is important on many levels. It sets
the "tone from the top" of the company's culture. An
effective Code of Ethics establishes the ethical
expectations for employees and management alike,
and sets forth the mechanisms for enforcement and
consequences of noncompliance. When the Code is
perceived as an integral component of the
organization's culture, is understood, followed and
enforced, it can enhance the efficiency of the
organization.
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26. THE JOHNSON AND JOHNSON CREDO
“ We believe our first responsibility is to the doctors,
nurses and patients, to mothers and fathers and all others
who use our products and services.
We are responsible to our employees, the men and women
who work with us throughout the world.
We are responsible to the communities in which we live
and work and to the world community as well.
Our final responsibility is to our stockholder.”
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27. THE JOHNSON AND JOHNSON CREDO
(CONTD.)
J&J’s credo defines a hierarchy of people to whom
J&J have a responsibility, rather than a specific set
of values. People working in J&J are encouraged to
make decisions inspired by the philosophy
embodied in the Credo, which challenges them to
put first the needs and well-being of the people J&J
serve.
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28. 1982 TYLENOL CRISIS
 The ‘Tylenol Case’ was a paradigmatic example of how the J&J
Credo works. When the connection between the Tylenol capsules
and deaths were made, the company’s reaction was determined
and quick.
 Within a few days of the incident, the recall of the product was
made. Moreover, the company itself prevented consumers from
using any Tylenol product until the cause of the tampering has
been established.
 J&J received recognition from the media for having acted quickly,
openly and honestly. Consequently, the company was able to
preserve its good name and reputation.
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29. COCOCOLA CODE OF CONDUCT
 In the multibillion brand of the Coca Cola
Company, the code of conduct is summarized in
five small lines:
 Act with integrity
 Be honest
 Follow the law
 Comply with the Code
 Be accountable
See http://assets.coca-
colacompany.com/45/59/f85d53a84ec597f74c754003
450c/COBC_English.pdf
An excellent read for those of you would be interested.
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30. WHAT SHOULD A CODE OF ETHICS
CONTAIN?
 First of all, your institution's Code of Ethics must
reflect your organization's policies, controls and
processes. While it may be tempting to short-cut
the process by "borrowing" policies from other
institutions under the guise of following "best
practices", unless those policies, controls, and
processes adequately reflect your institution's
unique organization and business practices, the
Code will not be effective in providing guidance
or offering protection.
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STAKEHOLDERS
BENEFITS
IMPLEMENTATION
CONTENTS
CODE OF
ETHICS
Key Considerations in Developing the Code of Ethics

32. SUGGESTED KEY ELEMENTS OF A CODE OF
ETHICS AND BUSINESS CONDUCT
A basic code should include policies on:
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CODE
OF
ETHICS
Conflicts of interest
Gifts and hospitality
Recordkeeping
Information
security
Co-operation with
investigations and
audits
Information
privacy
Whistleblowing
Insider trading

33. CRITICAL CONSIDERATIONS IN
OPERATIONALIZATION/IMPLEMENTATION
(A STEP-BY-STEP APPROACH)
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What’s the point
in having a code of
ethics if no one
abides by it???

34. In practice, there are several factors that can
contribute to the effectiveness of a code of conduct or,
on the contrary, can make it completely ineffective.
Among these factors are the following:
 The purpose of a code should be clear, achievable
and realistic
 A strong senior management should exist
 The code should arise from a real need and strong
motivation
 The code should form part of a broader ethical
outlook
 The code should be well written and well
implemented
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35. For an appropriate implementation of such a code,
several practices are usually applied:
 Making explicit a top management’s expression of
commitment
 Implementing a broad and effective process of
communication and dissemination
 Creating the position of ethical affairs or ‘head of
compliance’
 Providing a direct line
 Training
 Monitoring and auditing
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36. BENEFITS OF A CODE OF ETHICS
Having and implementing a code of ethics correctly can
bring about several benefits, among them, the following:
 Helping to express and articulate corporate values
 Providing guidelines for decision-making and dilemmas
 Preventing abuses within the firm
 Sending an ethical message to
to stakeholders
 Fostering corporate identity and
building reputation
 Helping to avoid or minimize litigation against the
firm against the firm
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37. Beneficiaries of Code of Ethics
 Internal Stakeholders:
 Employees
 Management
 Board of Directors
 External Stakeholders:
 Shareholders
 Clients, Customers, Members, Creditors
 Media
 The International Community
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38. CONCLUSIONS AND SUGGESTIONS
 To improve organisational governance and ethics
require more than fanciful ideas and expert
opinions as espoused in the preceding.
 What is needed are ethical leaders with the will to
agree on and implement what is right-action ethical
principles and practices - Chairmen, Directors and
those leading Auditing, Accounting, Banking and
Governance firms and institutions such as yours
and mine.
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39. CONCLUSIONS AND
SUGGESTIONS (CONTD.)- 2
 Citizens and residents of Trinidad and Tobago,
and indeed all other Caribbean territories expect
our politicians to meet equal if not higher ethical
standards. Not just to do ‘the right thing’ but
what is right for the majority of the people.
 I want to use this forum to call for a Code of
Conduct for Auditors to be established in each
of CAB’s member countries. Too many of our
professionals are operating as Auditors in the
front offices by day, and as consultants out of the
back officers by night.
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40. CONCLUSION AND RECOMMENDATIONS
(CONTD.) - 3
 Too many of our governance professionals are
establishing non-profit firms which serve as fronts
to mask their incestuous and corrupt activities
here in Trinidad and Tobago
 In the areas of public procurement, too many of our
professionals are bribing procurement officers to
get excessively high technical scores while very low
scores are assigned to competing bidders
 Finally, I am calling for the immediate separation
of the Audit and Risk Management functions in
organisations where the duality exists, to ensure
and preserve the integrity of the Audit Committee,
consistent with international Best Practices.
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41. Questions, please!
Thanks for listening.
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42. Very special thanks to my Research Assistant, Ms.
Ashely Roopchansingh for her invaluable contribution
to this presentation.
Contact:
Dr. Vindel L. Kerr
(868) 740-0168
vindelkerr@cwjamaica.com
www.vindelkerr.com
www.govstratltd.com
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