Governance: ethical awareness and leadership are essential elements in the post-crisis period

In our recent articles,¹ we called on corporate directors to reflect on their role during the current crisis and on the added value they can bring to help prepare their organizations for the post-crisis period. We then discussed the need for companies to identify new risks, including ethical risks, and make decisions while considering the impact on all stakeholders.²

By paying even the slightest attention to current events, one can see that major ethical issues are being reported in the media and simultaneously judged by public opinion. These issues include human rights violations, fraudulent bankruptcies, environmental disasters, corruption, misappropriation of public funds, the endangerment of lives and, especially these days, failing to protect the elderly. Legal compliance, in and of itself, is not enough to ensure that all decisions taken by corporate directors are ethical ones. We feel it is high time to take a closer look at the place of ethics in directors’ decision-making processes.

The hiatus caused by the COVID-19 crisis is an opportunity for businesses and the economy as a whole to reinvent themselves. As part of this reflection, organizations will need to assess not only how to ensure their continuity, but whether and how to contribute to the achievement of broader societal goals. This kind of transformation will require ethical awareness. As recommended by sociologist and philosopher Bruno Latour, “we must use this pause to reflect, to step back and question some of our ways of doing and thinking” (our translation).³

Ethical awareness

But what is ethical awareness? A study by the Chair in Ethics and Corporate Governance at the University of Paris-Dauphine offers interesting avenues for reflection on this subject. The purpose of the study was to better understand how directors utilize ethics in the performance of their duties. The authors looked at the concept of ethical awareness and its definition. After a review of the literature, one of the definitions they adopted was that of ethicist Lyse Langlois, who defined ethical awareness as “the capacity to consciously reflect on complex situations while maintaining an authentic, open and critical attitude towards oneself and others” (our translation).⁴ Hence, ethical awareness relates to a person’s ability to: (a) recognize the negative consequences that a given situation will have on others, (b) question him or herself about the issues, (c) discuss the dilemma with others and (d) adopt a position. One can easily imagine that a person who does not recognize the ethical aspects of a situation is unlikely to be able to manage in the face of ethical dilemmas.

However, there is reassuring evidence that ethical awareness can be acquired and developed. In a special report on the role of ethics in enhancing corporate governance, a researcher was quoted as saying: “… there is also broader evidence within organizational behaviour research about how you may shift an organization’s culture—and not necessarily just along the ethical dimension. It could also be something like innovation. Training is one of the ways in which you can try and shift the culture. I most certainly believe that you can shift the culture so that people start to think about ethical issues.”⁵

It is not unreasonable to consider that ethical awareness and organizational culture are closely linked. Ethical awareness does not seem to emerge easily in organizations whose ethical culture can be described as highly “controlling” and built around compliance with regulations, codes of conduct and policies. On the other hand, ethical awareness is more easily expressed in an organizational culture that fosters autonomy and accountability by all team members, including its management team and board of directors.⁶

Unfortunately, the current research on corporate directors’ ethical awareness suggests that ethics is largely perceived from a normative perspective, i.e. compliance with compulsory legal requirements.⁷ Moreover, many managers and board members seem to confuse the concept of ethics with that of deontology. Is this state of affairs due to the lack of ability to recognize or deal with an ethical issue when it arises or, more broadly, to the absence of suitable conditions for that ability to be exercised?

The review of research on ethics and governance revealed that many directors were afraid of the negative consequences (social, financial or professional) of raising ethical concerns at board meetings.⁸ This fear contributed to numbing their ethical awareness. Furthermore, several directors cited excessive social pressure to adhere to the majority position of the group.

How can a director break free from these constraints? Isn’t courage one of the essential qualities of a director? We believe this is where ethical leadership comes into play.

Ethical leadership

Ethical leadership is embodied in an organization that creates and supports fora for discussion. The chairman of the board plays a key role in this regard. The chairman should pave the way for directors to ask the right questions about situations that raise ethical issues. The chairman must create a setting for discussion and exchange that is free from political concerns—i.e. an “enabling” environment,⁹ where directors can discuss situations with an open and independent mind. The participants need to be aware of the conditions under which they will be able to take appropriate joint action in a situation, in an environment and within structures that permit adequate reflection and interaction.¹⁰ Open discussion is essential, as it allows directors to express themselves freely and to take a step back when needed to see things from the perspective of different stakeholders.

The special report by the Wharton School of the University of Pennsylvania addressed the features of an enabling environment in this way:  “One of the hallmarks of an ethical culture is openness, an environment where people not only feel encouraged to do the right thing, but also speak up about things that may be going wrong. Michael Useem, a professor of management at Wharton and director of the school’s Center for Leadership and Change Management, notes that one of the most visible hallmarks of an ethical culture is when leaders help create an environment where people at all levels of the organization feel safe to ‘speak truth to power’—a phrase whose origin is attributed to an old Quaker saying— without fear of punishment. Trust is the glue that binds organizations together. Trust withers when truth-tellers are victimized for speaking up when they feel they must.”¹¹

Another factor that could explain board members’ reluctance to speak would be their recognition of the limits of their competence on specific ethical issues. It seems apparent to us that, without proper training on ethical decision-making, it would be difficult for board members to fully appreciate the ethical aspects of a situation and to speak freely about them. Therefore, the board as a whole needs to ensure that its members have adequate ethics training and that this training is regularly updated. The training should not be confined to teaching the values or principles emanating from major philosophical traditions, nor should it be limited to providing tools for developing analytical or discursive skills. Consideration should be given to coaching or mentoring and to collaborative tool development. One can also use personal feedback and role-playing to help leverage lived experience. According to Grégory Aiguier, on-the-job training in ethics will “make actors aware of the conditions under which they will be able to take appropriate joint action in a situation; in other words, it will equip them to develop real power to act” (our translation).¹²

Can government encourage the instilment of ethical reflection?

As we have seen, ethics has a dynamic aspect that involves all parties. Does government have a role to play in fostering greater alignment between organizations’ behaviours and the new imperatives of civil society? Could the recognition of new business models by governments promote ethical leadership and cultural change within companies?

For example, in Quebec, the Table d’accompagnement-conseil des entreprises pour le développement durable (TACEDD) [Business advisory panel for sustainable development] offers coaching and a range of tools to help companies integrate sustainable development into their business model. Quebec companies can take advantage of this resource to improve performance and productivity while demonstrating their commitment to sustainable development. The BNQ 21000 standard of the Bureau de normalisation du Québec (BNQ) helps promote a structured approach to the management of sustainable development in companies. It is interesting to note the recent emergence on the legal landscape of for-profit enterprises pursuing a social mission. These are known as “social enterprises” or “Benefit Corporations”. This new business model emerged in the early 2000s. The primary motivation behind the initiative was to build successful companies that can provide important benefits to the community by putting their company at the service of the common good. This model can be implemented either by obtaining a “B Corp Certification”¹³ or by using a specific legal structure recognized by legislation (e.g. Public Benefit Corporation).

B Corp certification is issued by a non-profit organization to companies demonstrating high standards of social and environmental performance.¹⁴ To be certified, these companies must meet a range of requirements, including reporting requirements and an external audit by the certification body.

In addition, nearly 40 US states have passed legislation allowing the incorporation of social enterprises and granting them the status of Public Benefit Corporation. By acquiring this status, companies make it clear that their aim is not only to maximize profit for shareholders, but to provide a general public benefit, as well as one or more specific social benefits, such as environmental protection, health improvement, or promotion of the arts and sciences. The general rule is that, for a company to incorporate as a Public Benefit Corporation, it must make provision in its bylaws for at least one positive contribution, or the reduction of one type of negative effect, for a given category of person, entity, community or other stakeholder. With this status, company directors benefit from a degree of relaxation concerning their fiduciary duties. As a corollary, the company must produce a detailed biennial report on the actions taken to comply with the commitments set out in its bylaws. The same trend has been observed in France, where, in 2019, the government adopted the so-called PACTE law, which seeks to promote the pursuit of social and environmental objectives by recognizing the status of “Sociétés à mission” (Mission-driven Companies).¹⁵

In Canada, British Columbia amended its Business Corporations Act in 2012 to introduce a new corporate structure focused on social responsibility and sustainable development: the Community Contribution Company (or C3 for short).¹⁶ This type of company combines for-profit and non-profit elements and allows for social objectives to be pursued through its activities. The restrictions imposed on C3s, including limitations on capital transfers, dividend payments and the distribution of the company’s assets upon dissolution, demonstrate the seriousness of British Columbia’s approach to creating a business model that addresses the social and environmental issues associated with doing business.

British Columbia has recently bolstered this trend by passing Bill M 209, allowing specific companies to obtain the status of Benefit Company. The bill received assent on May 16, 2019.¹⁷ The new qualification comes with a number of responsibilities, including the obligation to consider the well-being of those affected by the conduct of the business, and the responsibility for fair and proportional use of available environmental, social and economic resources.¹⁸ These companies must also produce a detailed annual report demonstrating their adherence to their commitments, in accordance with reporting standards set by independent third parties.

Although they have their limitations and may be open to criticism,¹⁹ these certifications—whether legislative or self-regulatory—enhance the credibility and transparency of companies and strengthen their reputation and brand image. They are also a tool for market differentiation with investors, rating agencies, employees, consumers and contractors, as they recognize these companies’ high level of social and environmental performance.

The governments of Quebec and Canada could consider adopting such legislation or providing incentives to encourage organizations to apply for B Corp. certification. In our view, this would contribute to shifting companies towards a new business model, one that promotes ethical reflection by setting goals that transcend the mere production of goods and services and incorporate social and environmental deliverables focused on the long term and the interests of all stakeholders.

The Quebec government was already moving in the right direction before the crisis. For instance, in Finance Minister Éric Girard’s second budget, the government introduced measures to promote corporate governance behaviours that support the green economy. Many other states and governments are moving to relaunch their economy with green measures, in order to achieve an energy and environmental transition in conjunction with the smooth resumption of economic activity.

The COVID-19 crisis itself may have a lasting impact in this regard. Since the beginning of the crisis, there have been many private sector initiatives to join the global fight against the virus and its impact on society. For example, a digital platform called Le Panier Bleu was recently launched in Quebec to galvanize buy-local initiatives and support local businesses.²⁰ In addition, a large number of private companies decided to convert their production facilities to meet hospitals’ demand for specialized supplies.²¹

Seizing the opportunity to envision a new era

As mentioned in our recent articles, organizations will need to be ready for the post-crisis period. Not only do they need to give themselves the means to cope with future crises, but they also need to participate in creating a more resilient society and rebuilding based on a new vision of the world. The board will have to demonstrate independence, courage, concern for staff members and others, as well as rigour, integrity and transparency. It will need to ensure consistency between words and actions, as well as the necessary alignment of mission, vision and values in the post-COVID-19 era. To quote Michel Clair, “it’s clear that life goes on despite the current restrictions. As a director, looking ahead means reflecting on the lessons to be drawn from this unprecedented crisis, to see to what extent our company could make a positive contribution to caring for our planet and humanity, while also being more resilient in the face of adversity. How do we add value for humanity to our products and services?” (our translation).²²

In this recovery, social and governance issues are crucial. Climate change, the ecological crisis, sustainable consumption trends and the broader expectations of civil society cannot be ignored. It will be necessary to balance the preservation of life and the pursuit of livelihoods, and to consider both human resources and natural resources. These are difficult but necessary equations to ensure an organization’s continuity. Directors will need to be ready, trained, and in an enabling environment in order to deliver the added value that is expected of them.

The authors would like to thank articling student Rémi-Pier Fournier for his assistance in the preparation of this article.