Ethical leadership – The key to understanding King III

1. Ethical leadership – The key to understanding King III CIS Corporate Governance Conference Sandton Convention Centre Johannesburg 10 September 2009 Willem A Landman Ethics Institute of South Africa (EthicSA) www.ethicsa.org willem@ethicsa.org

3. Ethics vocabulary Ethics Values-based conduct Discretionary decisions grounded in values Values Standards/norms for good, right and fair conduct Examples: respect, integrity, responsibility, accountability, fairness Compliance Rule-based conduct (following laws, regulations, rules) Ethics codified Ethical dilemma Values clash Ethical reasoning Using values-based reasoning to solve ethical dilemmas 3

4. Making an ethical decision An “Ethics Quick Test” Is it legal? Do my organisation’s Code of Ethics/Conduct and other policies allow it? Do my professional standards allow it? What would my ethical role model do? How would it look on the front page of tomorrow’s newspaper? How does it make me feel? Would I be comfortable sharing my decision with my closest family? Does it pass the Golden Rule test? 4

5. Ethics in all human activities Religion Personal relations Education Animals and natural environment Organisations ETHICS Science Sport Professions — Law, medicine, accountancy, etc Politics Art 5

6. Ethics in all aspects of business Business ethics – The application of ethical values to organisational behaviour Boardroom strategies and control HR, IT, technical Product development Sales and marketing Accounting practices Relationships with agents, suppliers and customers (stakeholder relations) 6

7. King III – “Stakeholder triple context approach” to corporate governance QUESTION 1 To whom is the board responsible? QUESTION 2 For what is the board responsible? • All stakeholders • Stakeholder (vs shareholder) • model of corporate governance • Triple context performance • and reporting • Economic • Social • Natural environment 7

8. Relationship ethics/governancein King III • “Ethics of governance” • Ethics is the reason for corporate governance and the King reports • Every aspect of corporate governance is grounded in ethical values • Board responsibilities • Risk management • Internal audit • Sustainability 8 • “Governance of ethics” • A company’s ethics performance needs to be actively governed and managed • By means of a ethics programme

10. Principle 1.1: • “The board should provide effective leadership based on an ethical foundation.”

11. Ethical leadership • “Ethics of governance” • Corporate governance requires that the company is run ethically through effective ethical leadership • Strategic direction – Board sets tone at the top • Control – Board delegates operational aspects of ethics management • “License to operate” • Company earns approval from all its stakeholders

12. Ethical leadership • Ethical leaders • Set the tone at the top • Make ethics explicit • Legitimise ethics discourse • Are ethical role models • Encourage ethical conduct in others • Hold others accountable for the ethics of their conduct

13. “Ethics of governance”— Ethical values (“RAFT”) 1. Responsibility • Board responsibility for company’s assets 2. Accountability • Board able to justify its decisions 3. Fairness • Board considers interests of all stakeholders fairly 4. Transparency • Board discloses information in manner that allows for meaningful analysis of the company’s actions

14. “Ethics of governance” — Ethical duties of directors/leaders 1. Conscience Intellectual honesty; avoids conflict of interest; independence of mind 2. Care Devotes serious attention to affairs of company; acquires all relevant information needed for effective control and direction 3. Competence Has knowledge and skills; develops competence 4. Commitment Diligent in performing duties 5. Courage Courage to take risks associated with directing a successful sustainable enterprise and to act with integrity 14

16. Principle 1.2: • “The board should ensure that the company is and is seen to be a responsible corporate citizen.”

17. Responsible corporate citizenship • Company as collective citizen, analogous to natural person • Discharges duties in manner sensitive to triple context • Economic • Social • Natural environment • In South Africa it means that companybuilds trust by respecting rights • Universally recognised human rights • Constitutional rights

19. Principle 1.3 • “The board should ensure that the company’s ethics is managed effectively.”

20. “Governance of ethics” — The ethical challenges • Proactive: Building • Trust • Reputation • Defensive:Preventing • Fraud, corruption, theft • Cartels, insider trading • Conflicts of interest

21. 2.2 Develop ethical standards (code and policies) 2.3 Integrate ethical standards (ethics code) 2.1 Assess ethics risks and opportu- nities 1. Build ethical culture 2.4 Monitor, report and disclose

22. Ethics in organisations ― A statement • “Ethics is not an optional add-on to ‘normal’ business, nor it is a ‘soft’ issue. All business strategies and operations have an ethical dimension that we cannot escape — as we cannot escape our own shadow. Ethics holds enormous risks for companies, but ― more importantly ― creates reputational and competitive opportunities.”