The Board’s Role in Establishing a Culture of Ethics
Misconduct at the Highest Levels
In its 2023 global survey The State of Ethics and Compliance in the Workplace, the Ethics and Compliance Initiative (ECI) found that businesses face higher risk for misconduct and loss of trust than ever before. Many articles have been written since the early Sarbanes-Oxley days about what causes misconduct. In the nonprofit sector, misconduct by senior executives generally occurs as misappropriation of corporate resources, using position power to manipulate people or decisions, or not complying with laws or regulations. Misconduct largely occurs at the very top of an organization, and is manifested by those with the greatest power who have access to and control over resources, paired with insufficient checks and balances, including insufficient board oversight.
The Need for Integrity
Research indicates that integrity within an organization drives strong performance. Among others, Jack Welch (of GE fame) believed this. Mr. Welch described two dimensions that every manager was rated on: one dimension of obtaining results and one dimension of exemplifying company values. This produced four combinations of ratings outcomes. Top managers and promotable managers got good results and exemplified company values. Managers with poor results who were not living company values were candidates for termination. Those living out company values but getting poor results got another chance to perform, perhaps in a better fitting role. Those getting good results but not adhering to company values were also candidates for termination; GE believed their good results were short term and that over time the consequences of living out poor values would be poor performance results.
Donor Trust and Accountability
For many nonprofits, gifts from donors or grantors are the engine of financial stability. The trust of the donor or beneficiary is crucial. As many nonprofits have found, direct mail and individual donations are on the decline, with foundations, corporations and major donors picking up the slack. These classes of donors are likely to be more sophisticated and want assurance over the nonprofit’s trustworthiness, accountability, and program impact. See here for more information on managing this dynamic.
Because misconduct generally occurs at the highest level of the organization, the board has a critical role to play to foster an ethical culture throughout and ensure CEO accountability.
Is your board taking best practice steps to ensure integrity and ethical culture? We have compiled a checklist of practices to help you determine how you are doing!
Board of director appointments. Directors are independent in the strictest sense, beyond the legal definition of independence; they are not best friends, nor do they possess an outsized sense of loyalty to the Executive Director/CEO.
Conflict of interest. The organization’s conflict of interest policy is clear and comprehensive. Annual adherence is surveyed and noted for board and staff. During board meetings, it is routine to ask if there are conflicts of interest. Policies of recusal or absence from the room are utilized for those with conflicts.
Values. Core values of the organization are written down and shared broadly across the organization. Leaders visibly use them to make decisions. Employees can call out when values are not exhibited in products and services, decisions, policies, etc.
Code of conduct. The board has ensured that standards of behavior are outlined for all stakeholders including board members, staff, volunteers, and contractors, and that handbooks include the code of conduct.
Whistleblower protection. A policy is in place that encourages employees, volunteers, and stakeholders to report concerns. It promises no retaliation and ensures confidentiality to the maximum extent possible.
Ethics training. Board, staff, and volunteers engage with regular training on ethical behavior, conflict of interest, and the code of conduct.
Independent audits and financial oversight. Depending on organization size, annual audits by an independent CPA are conducted. Regardless of whether your organization is audited or not, interim financial reporting is regular and transparent and complies with Generally Accepted Accounting Principles (GAAP) so the board can ask questions. Questions of directors are answered with transparency. Breaches of financial controls are disclosed as a matter of course.
Board diversity. Diversity of directors brings varied perspectives to the table to reduce “groupthink.” The board fosters an inclusive environment, with all voices heard and respected.
Savvy Finance Committee. No matter the size, the board has a finance committee with experience in financial controls, financial analysis, commercial transactions, investments, and other topics that may apply to the circumstances of the nonprofit.
Conversations with the CEO and/or top officers. Whether formal as in a performance review or development discussion, or informal as part of encouraging and mentoring the nonprofit leader, ethical behavior should be built into the board-CEO dialogue. Christian faith-inspired organizations can implement the new standard for accreditation by the ECFA, which can be found here.
Transparent decision making. Transparency builds trust. Key decisions are made openly, relevant information is shared, and decisions are documented in the meeting minutes.
Self-evaluations. Include ethics as part of the annual board self-evaluation.
In summary, because misconduct mostly occurs at the top of organizations, boards must play a larger role in fostering an ethical culture and ensuring CEO accountability. By actively overseeing corporate culture, the board promotes integrity and moves the organization toward ethical excellence. The great news is that integrity drives performance, a virtue with its own reward!
At Missionwell, we understand your challenges and have a long history of helping nonprofit leaders achieve excellence in accountability and trust building with donors. Request a quote today, if you need assistance with the items on the checklist above so you can focus on making the world a better place. Our Corporate and Board Support Services team is here to help you accelerate excellence in your organization.