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Ethical Governance: The Emerging Role of Company

Secretaries as Ethics Officers
Joffy George, ACS and Prof. (Dr.) K.Sasikumar, Head of Department of Commerce,
University of Kerala, Kerala.

Ethics and Compliance go together in many aspects and in many companies individuals
responsible for the compliance function perform the role of ethics officer. Ongoing
e-mail : commitment to an ethical code backed by disciplinary procedures and regular
mastersjoffy@gmail.com monitoring of adherence to the code can help an organisation to negotiate an
increasingly complex business environment.

Introduction When individuals feel ‘remote’ from a principle in a code,

Many investors have faith in the ability of code of ethics to
meaningfully influence corporate behaviour and prevent
corporate mishaps. Code of ethics alone are unable to influence
corporate behaviour and prevent corporate misdemeanours.
If code of ethics are supported by everyone in an organisation,
from the chairman down, and are continually updated and
monitored, they can set a sound framework for decision-making
and risk management. Just saying ‘don’t lie and cheat’ isn’t
going to stop someone from doing it – how naïve. To be
successful, codes of ethics must have the support of everyone
in the organisation. As we know, ‘the fish starts stinking from
the head’. Having the right ethical structure in place fosters a
climate of transparency and a culture in which good decision-
making can flourish. But ethical structures do not have the
ability, or power, to eliminate dishonesty; they will never be
able to completely eradicate this part of human nature. Enron
had had a code of ethics which was not followed because the
corporate culture did not support it. It is generally agreed
that, to be effective, an ethical code has to be a living document
supported by an appropriate organisational culture and value
system. Moreover, to be of value, a code must be consulted,
updated and debated.
A host of factors determine whether a code will work.
Individuals ‘sometimes inadvertently flout ethical codes
because they misunderstand their duties’. A short-term
mentality to performance sometimes breeds a culture in which
it is acceptable to make decisions that compromise ethics.
this principle is unlikely to be followed. Many codes require
an individual to ‘avoid conflicts of interest’ but few explain
how this should be done. While codes of ethics will never
stamp out greed, a principles-based code can encourage
business to use its ‘ethical muscle’ to make decisions for the
long-term good of the organisation. Ideally, ongoing
commitment to an ethical code, backed by disciplinary
procedures and regular monitoring of adherence to the code,
can help an organisation negotiate an increasingly complex
world.
Business Ethics and Organisational Culture
As far as organisational culture is concerned, instead of
analysing various definitions of this expression, it makes much
more sense to describe its essential characteristics. Thus, ‘it
has a guiding role that helps to know which activities suit best
the firm’s personality, its existence is associated with the idea
of sharing intentions’; it is due to an empirical need to solve
managerial problems’; and finally ‘it is specific to each firm’.
It must be emphasised that ethical values can only have a life
of their own if we make sure they are shared by the vast
majority of corporate members. In other words, these values
cannot be in the mind of a single executive or a small group
of executives; they must be assumed by the rest of people in
the organisation. From this perspective, corporate governance
appears as a function that can largely help to consolidate
organisational behaviour patterns.

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If the senior management decides to formulate a strategy
without the involvement of middle managers and others, it
will have a difficult time espousing a collegial flow of authority
and influence. Culture is more powerful than anything else in
the organisation. We can go even further saying that
organisational ethical culture or, more specifically, the ethical
environment within the firm created through management
practices and espoused values, may be the most important
deterrent to unethical behaviour; or also point out that behaving
ethically depends on the ability to recognise that ethical issues
exist, to see things from an ethical point of view. This ability
to see and respond ethically may be related rather to attributes
of organisational culture than to attributes of individual
employees.
All firms have cultures, although it cannot be inferred from
this that the actions of all firms are ethically correct. There
are cultures where ethical issues are denied, ignored or removed.
Furthermore, trusting, admiring and respecting a leader do
not necessarily mean that followers will behave with integrity.
The ethics component of organisational culture is composed
of a complex interplay of formal and informal systems that
can support either ethical or unethical behaviour. The formal
systems include leadership, structure, policies, reward systems,
orientation and training programmes, and decision-making
processes. Informal systems include norms, heroes, rituals,
language, myths, sagas and stories.
Corporate Governance and Business Ethics
The complexity of corporate governance means that no one
theory or model of society is likely to be sufficient for
understanding, evaluating or designing governance structures.
In a similar way, it can be said that there is little consensus
on what good corporate governance entails. Another aspect
to have in mind is that corporate governance is not the panacea
for the resolution of group or individual problems within
the firm. In this respect, no leadership style can solve alone
all the situations in which a manager might find himself.
Emphasis will have to be laid on one aspect or another
depending on the specific department or individual
concerned. An essential quality for those who have to develop
this function lies in being able to diagnose the specific
situation and knowing which of the possible ways or styles
to deal with it is the best.
In short, leadership by corporate governance goes beyond
management, since it also includes the concepts of
encouragement, help and service to others with the purpose of
carrying out the organisational mission through ethically
correct work. This must be accompanied by the existence of a
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formal corporate ethics programme which should necessarily
incorporate the following elements:
(a) A code of ethics in line with the company’s ethical
expectations.
(b) Creation of ethical committees.
(c) Maintenance of ethics communications systems that
allow employees to report abuses.
(d) Appointment of an Ethics Officer.
(e) Ethical training and regulation of a disciplinary process
that can correct unethical behaviours.
Codes and Ethical Governance
The increased global emphasis on regulation of financial
markets is supposed to significantly improve the overall quality
of corporate governance. However, regulation by itself is not
enough to prevent company collapses. It is impossible to
regulate against greed and incompetence. Issues of trust and
integrity are paramount – no amount of regulation can influence
this. Public needs to be confident that regulations are in place,
but they did not want regulation to stifle growth. Regulation
is unable to prevent company collapses. The greedy part of
human nature cannot be eradicated by legislation – but
regulation can make it tougher for unethical behaviour to
flourish. Impetus for better corporate governance should come
from within an organisation.
A strong preference for a principled, rather than a prescriptive,
approach to regulation needs to emerge. Many feel that
prescriptive rules date quickly and foster a culture in which
the letter, rather than the spirit, of the law is followed. On the
other side, for many, regulation is only one part of the
corporate responsibility jigsaw, but one that can always be
improved. Regulators cannot be everywhere and do everything
– a better solution is for the whole market to work together.
Regulation can’t produce a blueprint for a risk-free world –
economic growth has to be tolerant of these risks.
Emergence of Ethics Officers
The strategic leadership of ethical behavior in business can no
longer be ignored. In any case, we run the risk of converting
much of what is related to business ethics into a mere fashion
if it really do not have practical value. A large number of
problems arise in this context that have to do with the creation
of the Ethics Officer figure and the role he or she must play in
order to champion business ethical values that can later be
assumed by the rest of the organisation.
Ethics Officer is someone who makes sure the organisation
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is doing its best to satisfy stakeholders (all those internally
and externally related to the firm, such as employees,
shareholders, clients, suppliers, the local community and the
society as a whole). From this important premise, the figure
of the Ethics Officer when he or she carries out his or her
task properly can become the meeting point between the
senior management, in general, and the rest of the
collaborators of the firm, as far as ethical issues are concerned.
We are aware of the fact that ethical management issues are
not easily delegated in the same way as production, marketing
or finance functions. Nevertheless, the creation of the Ethics
Officer figure is justified once the ethical guidelines have
been established.
Do you need an Ethics Officer?
Ethical governance encompasses, not only teaching people how
to be ethical but also teaching ethical people how to make a
good decision when it could be difficult. Two decades ago,
many businesses did not believe they had a duty beyond the
minimum dictates of the law. That just doesn’t work today. A
small number of wayward employees can sink a company,
however massive it is. For companies to survive, they have to
learn to be pro-active in the gray areas of business. That is
where the tough decisions are made. That is when ethics pays
off.
An “Ethics Officer”, is one of a new generation of corporate
managers who believe that “Business Ethics” need not be an
oxymoron. The goal of an ethics officer is not only to insure
that the company operates in a compliance environment but
that all bring a strong, personal sense of values to our every
day experience in the workplace. Many times, employees have
no place to turn when they are under pressure - there were no
clear company-wide ethical standards, no ethical hotline, and
no ombudsmen to take their concerns.
One of the roles of an Ethics Officer is to examine the stated
values, mission, and goals of an organization and to determine
whether or not the organization’s behavior actually supports
these statements. A company which claims to behave ethically
may use an Ethics Officer as a symbol of accountability,
showing that it does not just pay lip service, but actually has
an ethics code in force and appoints people to enforce it.
Ethics Officers can also be part of the ethical review boards
which review proposed experiments in the research
environment or consider other proposed activities which may
have ethical implications. The Ethics Officer may also be
empowered to undertake investigations into specific employees
or activities to confirm that they conform with company’s
ethical guidelines.
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Common characteristics of Ethics Officers
 They are strong communicators.
 They are objective and thoughtful.
 They have the ability to establish and maintain credibility
and trust throughout the organisation.
 They have the ability to quickly assimilate information
relating to complex issues.
 They have the ability to network on all levels of an
organisation.
 They have reached personal and professional maturity.
 They show rationality in tense interpersonal situations.
 They have a deep organisational knowledge.
 They have a working knowledge of applicable laws and
regulations.
 They have experience and training in ethics and
compliance.
 They have integrity and common sense.
Major Ethical Issues
Ethical governance is not just a question of process but of
mindset and values among all stakeholders – and this can pose
the greatest challenge. One thing is certain: nobody likes to
‘lose face’. Nervousness about doing the wrong thing has
heightened. If companies value the formalizing of an ethical
framework, it is surely because it helps them cope with an
increasingly complex business environment due to opening
markets, falling trade barriers, and intensified competition.
The threat of legal penalties exists, but that is not the main
motivation. Upholding the company’s good name and
reputation for integrity are important competitive advantages,
and that’s the main motivation.
Board of Directors shall pay enough attention to the following
ethical issues:
 Creating a culture of integrity
 Implementing a code of ethics
 Assessing level of adherence to code of ethics
 Fraud prevention
 Tackling actual or suspected fraud
 Tackling bribery
 Removing conflicts of interest
 Ensuring objectivity in financial reporting
 Equal treatment of shareholders
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 Different standards and values for different cultures in
various parts of the world.
Despite the obvious fear of being caught up in a damaging
scandal, concern over specific incidents of unethical behavior
is kept in check. Tackling actual or suspected fraud is cited as
the top concern. Next to that is preventing fraud in the first
place.
Fruits of a strong ethical culture
A strong ethical culture makes for a common sense of
management direction and clarity on decisions apart from the
following:
 Company’s overall reputation
 Compliance with laws and regulations
 Gain an edge over competitors
 Company’s attractiveness as a potential employer
 Company’s attractiveness as a potential supplier
 Management and staff motivation
 Company’s ranking in analyst reports
 Business performance
 Ability to obtain future investment
 Relationships with the investment community
 Share price.
Ethical Hurdles
The time and effort involved is the biggest hurdle in developing
and improving ethical practices inside any company. Other
major hurdles or challenges in ethical governance are:
 Short-term costs
 Concentration of share ownership
 Transparency of ownership structure
 Lack of government support
 Perceived as low value to the business
 Colleagues do not share the same concerns
 Company culture
 The existing company structure
 Convincing the board of its value/importance
 Lack of suitable non-executive and/or independent
directors
 Balancing the needs of the business with ethical
practice.
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Emerging role of Company Secretaries as Ethics
Officers
Company Secretaries should feel responsible for ensuring that
everyone in their company is ‘on the same page’, regardless
of where they sit on the corporate ladder or where in the world
they are based. It is commonly assumed that the Company
Secretary is the guiding influence when it comes to turning
ethical codes into practical action within a company. Given
the obvious potential for unethical behavior wherever major
decisions are involved, the assumption makes sense. However,
the role of the Company Secretary is still evolving, and that
many Company Secretaries crave clarity on the role that they
should be playing. A clear majority of Company Secretaries
see the ethical buck as stopping with the Chief Executive
Officer. Much strategic oversight is also placed in the hands
of many other officers, who play a key role in companies.
Very often the responsibilities borne by individuals are couched
in the context of a special committee or the board as a whole.
Allocation of responsibility for ensuring ethical practice in
the company spreads over the Board, Board level Committees,
Chairman, Chief Executive Officer (CEO), Company
Secretary, Chief Financial Officer (CFO), Chief Operating
Officer (COO) or someone specifically assigned the role of
an Ethics Officer.
Here comes the question, Who is steering? Company
Secretaries should be the driver of any number of key
measures, from helping to establish a code of ethics, to the
integration of ethical values into board and senior
management decision-making, and on to providing protection
for staff who raise ethical concerns. Company Secretary can
also play the role of a mentor, either through formal channels
or informally.
Company Secretaries should be directly involved in the
following activities in order to promote an ethical culture within
their company:
 Promoting an ethical culture
 Implementing and ensuring ethical practices
 Communicating reports on ethical behavior externally
 Set a good ethical example
 Ensure protection for staff who raise ethical concerns
 Support integration of ethical values into board and
senior management decision-making
 Help to establish a code of ethics
 Support assessment of adherence to code of ethics
 Act as an official or informal mentor for colleagues
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 Support the inclusion of ethical performance within
performance appraisals
 Support the inclusion of ethics as a subject in staff
training
 Help to establish an ethics hotline or whistle-blowing
policy
 Act as an official listener for employees’ ethical concerns
at work.
Conclusion
Absence of a right Ethics Officer can be cited as a reason for
paralyzing scandals in Enron, Worldcom, Tyco, Arthur
Andersen and many more. Perhaps if they had a strong Ethics
Officer at the right place, the fate of these companies would
have taken a much different turn. Such a position typically is
combined with the role of a Compliance Officer, responsible
for keeping up with and abiding by the latest laws and
regulations on corporate compliance.
First and foremost, Ethics Officers are responsible for
enforcing their company’s ethical code of conduct, which most
listed companies already has. Ethics Officer’s primary duty is
to educate every employee about the company’s vision and
values and that he or she is expected to conduct business with
other employees, partners, contractors, suppliers, vendors, and
customers with respect, integrity, open communication and
access. Enron, a company that faced one of the worst financial
scandals in United States history, highlights the point that one
of the most critical roles of an Ethics Officer is not just to
make sure that the company has a code of conduct, but also to
ensure that the Code is properly communicated and enforced.
The level and requirement for ethical governance will vary
greatly, depending on the nature of organization, size and type
of industry. But they all lead to one general answer - ethics
officers should never do it alone. A truly effective ethics
program involves the participation of all executives in all
departments.
Ethics and Compliance go together in many aspects and in
many companies individuals responsible for the compliance
function perform the role of Ethics Officer. In India, as per
the Listing Agreement, Company Secretary performs the role
of Compliance Officer and he or she should be equally equipped
to effectively perform the emerging role of Ethics Officer
too. By virtue of his/her position, a Company Secretary can
communicate often with board members about ethical issues
and concerns. As well, Company Secretary can communicate
with employees regarding ethical concerns, and make himself
or herself readily available and open to address any ethical
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concerns. It’s certainly not an easy job. It requires wearing
many hats, including being a friend to concerned employees,
a disciplinarian to rule breakers, a mediator within the entire
company, and a diplomat to all. 
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19. Douglas, P. C., Davidson, R. A. and Schwartz, B. N. (2001)’The effect
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Corporate Governance – An Economic Perspective
(Contd. from p. 456)
Does the company secretary fit in to the economic
efficiency theories?
From the above discussion on the point raised by Professors
Fox and Heller, it is easy to link that the company secretary
can make a difference. Non-pro rata distribution of wealth
generated by firms to the shareholders resulting from diversion
of claims of the company by the managers from rightful
claimants can definitely be put to check by the presence of a
company secretary in the organisation. A company secretary
can ensure that managers do not divert claims of the company
by refusing to give effect to share purchases by outsiders, or
by refusing to accept board directors lawfully elected by such
shareholders, or by issuing shares to insiders against inadequate
consideration and so on. It is the job of the company secretary
to ensure that such malpractices do not occur, and he is the
compliance officer of the company charged with ensuring
proper compliance with all legal requirements. These fall
within the purview of his day to day activities. The company
secretary can therefore be instrumental in effecting pro rata
distribution of residuals generated by a firm and thereby make
his contribution towards the economy. Similarly, the company
secretary may also be instrumental in ensuring that the company
has a long lasting relation with all its stakeholders and thereby
increase the sustainability of the organisation for greater
economic benefit.
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Conclusion
Developing an all-proof framework for efficient corporate
governance that ensures complete legal compliance, efficient
allocation of resources, optimum level of investment from all
stakeholders in a company, long-lasting business relationship
and sustained business and economic growth and which at the
same time ensures that directors and managers remain
accountable to the shareholders is a herculean task. And if
developed, such a corporate governance mechanism would be
an ideal one. The reason is simple, quite contrary to the popular
belief, corporate governance does not start and end with merely
a set of rules, guidelines and policies to be complied with. It
is much more with much wider implication and good corporate
governance has its positive impact on the economy of the entire
nation. It is not just about directors and managers remaining
accountable to shareholders, or even the wider version that
targets the stakeholders as the beneficiaries of good governance.
It is rather about treating a company as an economic unit at
the minimum and that what it does, does not merely affect its
employees, creditors, investors, competitors, customers and
the government, the impact is on the entire economy. For
economically developing countries like India, this consideration
gains all the more importance and we are compelled to think
that the rightly planned corporate governance structure in
companies that puts due emphasis on economic development
of the country is the demand of the hour. 
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