Integrity and diversity: Setting the tone at the top

E ngā mana, e ngā reo, e rau rangatira mā
Tēnā, koutou katoa

Nō Waitaha ahau
Ko Aoraki te maunga
Ko Waitaki te awa
Engari i tipu aku ahau ki Whakatane

Ko Kirsten Patterson tōku ingoa

Kia ora everyone. My name is Kirsten Patterson, but everyone calls me KP, and it’s my great honour to the Chief Executive of the IoD in Aotearoa/New Zealand.

As a member of Transparency International for some years it is an honour for me to be invited to speak at the AGM. Thank you.

Tonight, I have been asked to talk about two things:

The role of governance in setting the tone from the top for integrity, and
the importance of diversity to transparency and the achievement of good ethical practice.

Incidentally, these are two topics I am particularly passionate about… so be warned! 

As you’ll appreciate these are both enormous subjects and in my limited time we will likely only touch the tip of the iceberg. But the important thing is that we are making, and taking, time to have these conversations – and with that we make progress.

Tone at the Top

Now a lawyer talking about ethics is often seen as the opening line of a joke or cartoon, but no longer is the test of whether it is “legal” or “allowed” sufficient to determine whether our business models are ethical. We are, and we should be, being held to a higher standard by consumers, shareholders and stakeholders. A standard higher than just what the statutory minimum floors prohibit or protect.

Social media is also driving and demanding transparency and accountability in our ethical conduct in ways not seen before. Industries once seen as ‘blue chip’ no longer pass the ethical investment test, and many are seen as sunset. Directorships of tobacco giants are no longer celebrated on LinkedIn. Corporations such as Walmart are redefining their sales boundaries following calls for gun reform in the US.

But it is clear from recent examples, be they Facebook and Cambridge Analytica, the Australian banking enquiry, or here closer to home with the cases of bullying and harassment in the NZ legal profession and in NZ sport, that ethical debates are not something we can afford to ignore in the boardroom.

Where before we might have only seen directors out of the boardroom for health and safety site visits, the growing emphasis on good ethical practice, human rights in business, and transparency in the supply chain has more and more boards conducting site visits to see the workplace in action and conducting factory tours of offshore production sites. It’s not just ‘fast fashion’ industries under the spotlight as contracting processes and power imbalances are under greater scrutiny.

No longer is it enough for Boards and leaders to be merely concerned about the ‘Tone at the Top”. We must understand and influence the “Mood in the Middle” and the “Buzz at the Bottom”.

Integrity is non-negotiable

Integrity is the foundation, the cornerstone of any business or organisation. Or at least it should be. Some of the situations however that have been in the media, and part of business conversations and discussions recently indicate that perhaps it hasn’t been valued as highly as it should be. Integrity perhaps has been eclipsed by things thought more pressing, more immediate. Maybe people got complacent, too busy, took it for granted, focused elsewhere. And when that happens – there is a ripple effect.

But here’s what’s been happening

Earlier this year, the Financial Markets Authority and the Reserve Bank of New Zealand released a report on life insurer conduct and culture. The report said, and I quote:

“Life insurers have been complacent about considering conduct risk, too slow to make changes following previous FMA reviews and not sufficiently focused on developing a culture that balances the interests of shareholders with those of customers.”

Following the release of the report, Reserve Bank Governor Adrian Orr said:

“Public trust in life insurers could be eroded unless boards and senior management transform their approach to conduct risk and achieve a customer-focused culture.”

Then in February, the long-awaited final report of the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry dominated trans-Tasman headlines. 

The Royal Commission highlighted the connections between failings in governance and the occurrence of misconduct. Key criticisms were that boards of financial services entities often did not receive the right information about emerging non-financial risks, and did not do enough with the information they did receive to oversee and challenge management in relation to such risks.

The report validated the findings of the IoD’s 2018 Director Sentiment Survey which found that less than half of all NZ boards receive comprehensive reporting from management about ethical and conduct matters. Less than half.

Commissioner Hayne found that financial motivations were prioritised at the expense of basic standards of honesty and misconduct.

We have been doing much to promote the royal commission report to New Zealand Directors. The recommendations are valid for all directors across all industries.

Do we genuinely think that the professional and experienced directors sitting on some of these large bank boards sat down at a board meeting one day and said, “I know, lets sell insurance products to dead people!”. “Yes, I agree, let’s make sure that’s minuted.” Of course not. But somehow, through unintended consequences of remuneration policies and failure to monitor outcomes and not just financial performance, that is exactly what happened.

The Board can’t be held responsible for every rogue person or bad-apple, but they can be held accountable for not ensuring that the apple barrel wasn’t the cause or at least permissive in allowing the bad-apple to rot others.

CEO Pay

Last month I attended our sister organisation’s conference in Washington DC – our American equivalent; the National Association of Company Directors conference which is the largest gathering of Directors globally with over 1,800 attendees.

An interesting statistic shared by one of the speakers was as follows:

In the 1980s in the US CEO pay ratios to average worker pay were 40:1. They are now between 350-400:1.

Do we genuinely believe CEOs of today are 10x better than the 1980s? As a CEO of today I would of course like to think so, but…

As CEO pay ratios increase, shareholder and Community unease and expectations about executive remuneration and pay transparency are increasing at a similar velocity.

Integrity and Character

One of the stand out speakers for me at the IoD Conference a couple of years ago was a UK economist, John Kay. He made a statement that really impacted on me –

“Too long have we been in the hands of people who see leadership as a prize and not as a responsibility.”

Internationally we have seen significant falls in trust in corporations and capitalism across the whole society.  Number 1 decider for employees in US when choosing which company to work for? Trust in the leader.

Integrity is a personal characteristic. Leaders need integrity if their organisations are to develop a culture of integrity.

As McKinsey’s Marvin Bower, whom Harvard referred as the father of modern management consultancy, said: “There is no such thing as business ethics. There is only one kind - you have to adhere to the highest standards.”

Diversity is a big challenge…but also a big opportunity

Then in March this year we had the devastating Christchurch terror attack. As directors and leaders, we must continue to champion an inclusive culture; particularly in light of Christchurch.

We are a nation founded on a principles of partnership under Te Tiriti o te Waitangi. Over 25% of New Zealand’s population was born overseas. We are a multicultural and multi-faith community. One in four New Zealanders identifies as having a disability. Our organisations are crying out for talent and our communities are crying out to be included.

We need to put a stake in the ground and be explicit that diversity matters. Directors need to embed ethical culture by integrating diversity into discussions on performance, strategy and risk. This will help create a climate that will influence ethical behaviour in the workplace.

Given the audience I am sure I don’t need to go into the business case for diversity as I have to do so often with many in the media or those hosting talkback radio. You all know the positive impacts it has on business performance, integrity systems, whistleblowing and speak up cultures, risk management, innovation etc, etc, etc.

Suffice to say the IoD firmly believes that Boards and organisations are at their best when they are inclusive and distinguished by diversity of thought and experience.

The crucial role of leaders

I understand integrity and diversity are not easy issues to deal with. However, as I look around this room, I see the faces of change. I see the faces of people who can make a crucial difference.

You are doing THE most important thing — and that is stepping forward, taking responsibility, being open to learning, questioning and thinking about how a new future might look if we tackle these essential challenges. We need more conversation and collaboration – none of us can make the change alone.

So what should we do? What can we do around integrity and diversity — two important and essential ideals for organisations and for our society? In some ways, the actions we take are relevant equally to both. May I offer four suggestions —

1. Make a commitment: As leaders, we need to set the tone from the top. Leaders should embody, inspire and promote organisational values and ethical behaviours. We should walk the talk. Often, the scope and success of integrity and diversity initiatives in organisations depend on leaders’ personal commitment.
2. Hold others and ourselves to account: Maia, tika pono – courage and integrity. The standard you walk past is the standard you accept. We need to be willing to probe, examine and challenge. Our mantra should be ‘show don’t just tell’. And, we need to be willing to understand and be open to everything including bad news. We need to applaud and celebrate when our people have taken difficult and challenging paths to get to the right place. That’s one of the great things about the ‘fail fast’ philosophy in start-ups. They have a high threshold for allowable failures — and that builds a culture of transparency.
3. Embed the culture of integrity in our organisations by integrating this into discussions on performance, strategy and risk. We need to deeply consider the unintended consequences of our decisions and policies on behaviours and outcomes.
4. Champion an inclusive culture. We need to be explicit that diversity and inclusion matters.

At the IoD, we run a number of programmes which don’t just signal that diversity is important for us, but actually help organisations build more diverse boards including the Mentoring for Diversity programme and the Future Directors programme which provides opportunities for aspiring directors to gain first-hand board experience by participating on a board of a New Zealand organisation for a year. 

It is not an issue of pipeline – diverse governance talent is available, ready, and qualified to serve.

Conclusion

Can I conclude by confessing that one of the reasons I accepted the role of CEO at the IoD was the platform for change it represents – if we want to change our communities, we need to change our organisations, our businesses, and that starts at the top.

In this room there are so many of us who have the positions that allow us to influence the directions and the choices that organisations make. But with that privilege comes responsibility.

As we take on those responsibilities every day it may be good to remind ourselves of these words from author Brené Brown who I was lucky to see speak in the US last year:

“Integrity is choosing courage over comfort; it’s choosing what is right over what is easy; and choosing to practice our values rather than simply professing them.”

Thank you for choosing to commit yourself to high standards.  New Zealand has never needed Transparency International members more.

Tēnā koutou, tēnā koutou, tēnā tātou katoa 

Thank you.