Article on Governance and the Board’s Role in setting the Ethical Tone

Richard M. Biery, June 2002

Lack of governance integrity has reached such proportions that the very assumptions upon which our free market capitalistic investment system is based are being shaken. Why do I say governance and not management? What has happened to the board? We tend to ignore the board and focus on Management when yet another corporate malfeasance is revealed. But note that it is the governing board that is the method by which virtually all our institutions and organizations are ultimately controlled. Governance is the term for what boards of our companies and institutions do to control them. And its quality and integrity are critical, especially today. Robert Greenleaf, author of Servant Leadership and father of the contemporary servant leadership movement, pointed out that most of our lives are now lived in, with, and through institutions. Ideally, governance should include instruction and continuous assessment by the board regarding achieving organizational purpose while adhering to stipulated acceptable behavior. For example, concerning the latter, they should “set the ethical tone” and assure it. They rarely do, even in religious organizations, not from lack of character, but from lack of a process discipline.

Unfortunately, there is a large knowing-doing gap in board governance. Boards typically set neither the ethical tone nor the purpose-based strategic ends for the organization. Instead the prevailing board process today is custodial and reactive. It appears the Enron Board with its highly scripted board meetings never even stated policies regarding adherence to legality, much less prudence. If it had and then insisted on regular data proving compliance, Management would have had to lie to its board to do what it did. That still may have happened, but the board’s will would have been clear. Any smoke the board smelled would have had definite actionable policy violation implications. The board had no such policies and had even waived its own ethics code.

The usual form of board process, that of reports, questions, and approvals, does not constitute proactive leadership on the part of the board. It rather reveals a reactive and passive board. Integrity of governance is endangered, if not lacking, under such governance. Worse yet, passive boards unknowingly contribute to the corruption of the office of CEO because of failure to oversee power. Unchecked power, no matter the organization or amount of trust the board has in the CEO, is corrupting. The board becomes inadvertently complicit in permitting such corrupting power.

To achieve and assure governance integrity trustees must be trained in governance. Training and experience in management are, at best, insufficient for trusteeship. The trustee is not called to manage but to govern, requiring a different set of attributes and competencies. Neither is instruction in boardroom tips and good ideas adequate for governance competence, nor does it even enable a board to be proactively strategic or “set the ethical tone.”

Until boards see themselves, not only as the legal and moral agent or trustee for ownership, but as a vital part of the organization expected to added value for the owners (real or moral) and are willing to invest in themselves, they will continue governing (or not governing) as they always have. They may be earnest, well-intentioned, moral trustees, but their governance will lack the initiative and integrity necessary to protect the organization, risking failure in their fiduciary responsibility as trustees.

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