What non-executive directors should know about tone [PART 1]

What is tone at the top and what does it mean for the role of non-executive directors? A survey by one leading consultancy has shown:

“A resounding agreement from our respondents that Tone at the Top is vital in developing and maintaining the ethical integrity of the business. Without it the ability to mitigate the risk of something going wrong is significantly impaired.” [1]

The Basics

Senior management needs to provide Tone at the Top regularly, as part of the formal leadership of the organisation. It’s a way of talking about important aspects of running the company:

Values; Mission ; Aspirations; Ethics; and Intentions

Together these clarify how the company does things—its corporate culture. It’s more about how leaders want things to be, rather than an exact description of present arrangements.

Tone is about creating a culture where everyone has ownership and responsibility for doing the right thing—because it’s the right thing to do.

Why is Tone at the Top important?

Various forces drive pressure to create Tone at the Top. Being aware of these can help shape how you might contribute to this leadership effort.

First, there’s the formal, regulatory climate facing so many companies these days. Almost every company must navigate this territory—particularly in financial services. In the US for example, the need for an appropriate tone from the top is mentioned in the Sentencing Guidelines for organisations accused of violating regulations.

In the UK there’s the Bribery Act’s Six Principles of Adequate Procedures, which similarly expects to see appropriate tone at the top. Specifically it suggests:

“Internal communications should convey the ‘tone from the top’ but are also likely to focus on the implementation of the organisation’s policies and procedures and the implications for employees.”

Likewise, the OECD Good Practice Guide on Internal controls demands “strong, explicit  OECD Reportand visible support and commitment from senior management to the company’s internal controls, ethics and compliance programmes…”

Regulators therefore expect to find evidence of an appropriate Tone at the Top. They seek it when reviewing how a company is performing under the regulations.

They may regard its absence or lack of relevance as a serious failing—a sign something more substantial may be going wrong.

This may lead to further investigations and in extreme cases, to fines for failing to give sufficiently clear and robust direction from the top in respect of ethics and compliance.

Secondly, regardless of regulations, tone is one way senior leaders explain to employees how they want the company to operate. Using tone they are saying

“Here’s what really matter to us.”

Thirdly, tone shows all stakeholders, beyond employees, where the leadership wants to take the company, and how. Thus it can affect the responses of investment analysts, suppliers, unions and others who view the company and its approach to doing business.

How does Tone happen?

There are both formal and informal ways used by senior management to convey tone.

Formal ways include public pronouncements, newsletters, town hall type meetings, videos, and actual visits to teams, departments, branches, factories, projects and so on.

Such visits are often deliberately designed to convey a clear message that provides the required tone.

Informal ways include how leaders actually behave in their interactions with other people, both inside and outside the organisation.

The behaviour of leaders and the signals they send are more important than strategy or pronouncements. For example the earlier mentioned PWC survey found

Leaders act as rolemodels2“40% of respondents said leadership did not always act as role models in setting the right tone from the top.”

connecting with tone Connecting with Tone at theTop

The first requirement for every non executive, is to fully understand the nature of the present tone at the top.

For example, do you know the values, mission, aspirations, ethics and intentions of the CEO and his or her team?

If these aren’t entirely clear to you, they certainly won’t be for any other stakeholders, especially employees.

An early action you can therefore take as a non-executive director is ask about these in a genuine spirit of enquiry.

You’ll be promoting better communications, and supporting the senior management team to become clear themselves about these aspects of the corporate culture for which they are responsible.

Another practical action is to discuss with your senior management the present form their Tone at the Top takes—the content of communications, pronouncements, meetings, and others actions they set in motion.

For example, while a leader may stress the importance of the company being ethical, or avoiding bribery, what matters more is what that leader or his top team initiate to ensure there is action on the ground.

So a third action you can take is to check:

“How does this Tone you’re setting convert to action throughout the organisation?”

Yet another way of connecting with the Tone at the top is to discuss with senior colleagues how you personally might support the desired tone at the top. For example, what message should you be giving when you interact with others in the company or elsewhere?

If you meet employees for instance, does your particular communication align with the one being promoted by the leadership?

When people encounter a non-executive talking about the same issues as the full time leadership it provides an important re-enforcement in the minds of those on the receiving end.

Importance of the Board

signalling from the board

 

For tone at the top to work it’s essential there’s a strong Board.

There’s growing awareness in companies of the implications of signalling from the top.

Also different approaches may be relevant, according to a company’s stage of development.

As a non-operational member of the board, you play a special role in influencing the nature of the signalling from the top.

For example, having pressed for clarity on issues such as values, ethics and compliance, request evidence of actual follow through—of the leadership “walking the talk.“

Similarly, you can play a useful role in making sure the messages about important issues such as ethics occurs regularly and not just on special occasions.

Employees and other stakeholders quickly spot whether or not the purpose of the enterprise, its values and standards are regularly, or only sporadically discussed at the top.

For example, one CEO was famous for referring to the business ethics code only once a year. Most employees realised that while he lauded the program on the day set aside to honour it, he never referred to or inquired after it any other time.

CULTURE SHIFTMastering the culture

For any outsider such as a non-executive director, it can be a hard to get to grips with the culture of a company—to understand how things happen in the organisation.

Even those who think they know the culture may find, once they become an insider, it’s less obvious than previously thought.

This justifies a special effort to master the culture so that suggestions and proposals for change are firmly grounded in the reality of how things are.

Most non-executives are recruited for their experience and special ability to contribute in some specific way—business experience, knowledge of finance, awareness of the market, valuable contacts, and so on.

Increasingly, one of the most vital contributions non-executives play is helping use their special expertise to ensure the company acts in an ethical, or responsible manner. That is to ensure integrity pervades the ethos of the organisation, starting with the right tone at the top.

Here are five critical factors that support an effective integrity program:

  • GUIDANCE: advice on values in the company must make sense and be clearly communicated—in your view is that happening?
  • COMMITMENT: the company’s leader must be personally willing to take action on the values—does the leader reflects this through what he or she says and does?
  • VALUES: these must be integrated into the normal ways of managing, for example do they pervade critical decision making; does this actually happen—what evidence can you obtain that it does?
  • EMPOWER: managers at all levels must feel able to make ethically sound decisions on a day-to-day basis.—is that actually happening in your view—check it out through your talks with managers
  • AMBASSADOR: In your view is the CEO a good representative for compliance?—is there to support this and how easy is it to obtain?

Signs of the right cultureNon executive directors can and should play an important part in both helping to sharpen up the tone at the top, secondly seeking evidence it communicates across the organisation and is reaching all stakeholders.

The above provide some of the basic guidelines for making sure your role delivers real value for the company when it comes to Tone at the Top.

A new handy Guide for non-executive Directors will be published at this site on January 12th.

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Sources:

1.Tone from the Top: Transforming Words into Action, PWC, 2012
2.The All-Star Game and Tone at the Top, LexisNexis® Legal Newsroom
Corporate, 7th June 2015
3. Business Ethics Communications and Feedback

 

© Andrew Leigh 2015

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