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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 8 th Annual General Meeting & Conference, 10 th -11 th July, 2014 Hilton Hotel, Port-of-Spain, Trinidad and Tobago By Vindel L. Kerr, DBA
42

Improving Organisational Governance and Ethics

Apr 13, 2017

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Page 1: Improving Organisational Governance and Ethics

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

Page 2: Improving Organisational Governance and Ethics

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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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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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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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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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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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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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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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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CORPORATE GOVERNANCE

SYSTEM

Ethical Standards

Accountability

Vigilance

Internal Control Transparency

Strategic Direction: Vision,

Mission & Strategy

A Basic Corporate Governance System

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The Board as the Fulcrum of Organisational

Ethics and Governance: 0

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The Board of

Directors

Vision, Mission &

Strategy

Performance & Reward Systems

Balancing Stakeholders’

Interests

Governance and Ethics

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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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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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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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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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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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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

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

Page 19: Improving Organisational Governance and Ethics

19

EXECUTIVE ETHICAL LEADERSHIP

REPUTATION MATRIX

Weak Strong

Strong

Weak

Moral Person

Moral

Manager Hypocritical Leader Ethical Leader

Unethical Leader

Ethically neutral (silent) leader

?

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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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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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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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TOWARDS A CODE OF ETHICS AND BUSINESS

CONDUCT

What is it?

Its Purpose

Case Illustrations

The Code of Ethics

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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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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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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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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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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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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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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

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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

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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???

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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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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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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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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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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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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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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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Questions, please!

Thanks for listening.

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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

[email protected]

www.vindelkerr.com

www.govstratltd.com

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