The Ethical Boardroom: A Guide to Establishing Ethical Leadership on Boards

The role of the Board of Directors is an important one—arguably the most important in your entire company. 

Your board is responsible for setting your company’s strategic direction, establishing governance principles, setting risk appetite, overseeing leadership and management, fulfilling fiduciary duties, and much more. 

Your directors need to be curious, strategic, determined, and adaptable. But there’s one more thing they must be—ethical. It’s an important director trait that far too many overlook. 

Why Boards Must Be Ethical

Just over 10% of employees worldwide feel they’re part of a strong ethical culture at work, while 65% have observed misconduct in the last year. That’s troubling. 

As Jeannette Lichner, Portfolio NED and former FCA NED, explains, “When I think of board members who I want to be involved with they are highly ethical. What do I see in them? People who I trust, who are open, candid in sharing what they know and don’t know. They are humble, inquisitive, and ready to ask even the simplest questions to confirm their understanding. They don’t hesitate to pause proceedings to revisit the fundamentals if necessary.” 

Legal Ramifications

If you want a company culture built on honesty, integrity, and transparency—you need directors who are honest, ethical, and transparent. After all, your board of directors will set the tone for your entire company’s culture. 

If your directors are self-centered, dismissive, and unapproachable—that’s the culture you’ll cultivate in your company. And cultivating a culture such as this can have serious repercussions. 

For example, in 2001, the board of directors at Enron was implicated in unethical accounting practices that hid the company’s financial losses. The scandal led to the bankruptcy of Enron, criminal charges against company officers, and sweeping changes in securities laws through the Sarbanes-Oxley Act. 

But Enron isn’t the only company to have fallen into the trap of not taking board ethics seriously enough. Tyco International made almost the same mistake in 2002, just a year later. The board of directors at Tyco International was criticized for its failure to detect and prevent the CEO and CFO from stealing hundreds of millions of dollars from the company. Ethical lapses also led to prison sentences for those involved. 

As you can tell from the examples above, boards responsible for ethical lapses can face not just corporate consequences but also personal liability in some jurisdictions. But the legal ramifications for lapses in ethics, like those faced by Enron and Tyco, aren’t the only reasons your board needs to be ethical. 

Reputational Ramifications 

Your board also needs to be ethical because being ethical protects your company’s reputation, which is paramount. Not only do customers, clients, and consumers shun companies with bad reputations, but top talent does too. In fact, companies suffering from a negative reputation have to offer a premium—up to 10% more in compensation per vacant position—to attract the same level of talent that their competitors do without the increase. 

And it’s not just a talent issue—because let’s face it, an unethical board might not even care about that—it’s a market value issue as well. In fact, 63% of a company’s market value is tied to its reputation. This means that the perception of your board as either ethical or not can influence your market value by an astounding 63%. That’s significant. 

As Jeannette Lichner points out, ethical board members “are always prepared—they go beyond just reading the board papers. Most importantly, they consider decisions in the context of the organizational purpose and the impact on all stakeholders, and they do what is right—not just what may be legally permissible or highly profitable, but what is right. They are fierce protectors of the organization’s reputation.” 

Similarly, Professor Charlotte Valeur, Chief Executive of Global Governance Group, emphasizes, “An ethical board will act in the best interest of the company and all its stakeholders. They understand the responsibility of serving a company and do not make self-serving decisions. Right and wrong are very clear to an ethical board, and generally they will avoid operating in the gray areas.” 

Where Board Ethics and ESG Intersect

Legal and regulatory compliance, along with reputational protection, aren’t the only benefits of having an ethical board. 

There is the trickle-down effect of leadership style and how ethical board members foster ethical managers. Stakeholder trust is also increased through board ethics, and entering new markets becomes easier when your board is known for ethical conduct (not to mention the ease of governmental scrutiny). 

An ethical board is invaluable for Environmental, Social, and Governance (ESG) initiatives and success too. 

So, let’s quickly examine the effect that an ethical board has on ESG: 

Environment

Ethical boards are green boards because being truly ethical involves considering the welfare of others. Plus, being green comes with a whole host of its own benefits. In 2023, 89% of industrial, energy, and natural resources companies rated ESG as important to them—and 46% said that their ESG initiatives had already improved their company’s reputation (and, again, your company’s reputation has a big impact on its market value). 

Building on this notion, organizations are integrating the protection of the environment into their corporate strategies with ambitious goals. These goals often include achieving carbon neutrality by a certain year, committing to waste and emission reductions, creating wide-reaching sustainability programs, adopting new environmental technologies, or investing in research and development for sustainable business practices. 

The main task for an ethical board in upholding the “environment” aspect of ESG lies in ensuring that the company’s goals are not just a list of targets, but that they infuse every aspect of the company’s purpose. This alignment is what will drive true sustainability, and an ethical board is the key to getting it right. 

Social

The “social” part of ESG is just as important as the environmental one. Many companies have learned this the hard way, including big name brands like Nestlé. In the past, Nestlé has faced allegations regarding the use of child labor in its cocoa supply chains. A class-action lawsuit was filed against it and other chocolate producers in the United States by citizens from Mali, accusing these firms of complicity in the illegal enslavement of children. 

Nestlé asserted (and continues to assert) its dedication to eradicating child labor and reports taking actionable steps to address these issues. In 2022 a lawsuit targeting companies including Hershey and Nestlé was dismissed by a Washington, D.C. federal judge. This case, despite its dismissal, demonstrates the importance of corporate boards seriously addressing the social component of ESG and the perceptions of their contributions in this area. 

An ethical board should not only address internal social policies but also extend its care to the broader community. It should support fair labor practices, safe working conditions, competitive wages, and unionization where necessary. Beyond the company’s walls, ethical boards should engage in community development and support local enterprises. 

Ethical boards should take consumer rights seriously, too. They should oversee marketing transparency, product safety, and the responsible handling of customer data. These efforts build trust and foster long-term relationships with stakeholders. 

Governance

Boards that don’t take their role in governance seriously sink companies. This could be seen in the case of Lehman Brothers. In this case, the board’s lack of oversight of the firm’s risk-taking behaviors in the subprime mortgage market contributed to the company’s downfall during the global financial crisis in 2008. 

Any board is at the top of any company’s governance pyramid—but an ethical board is also at the top of its company’s moral pyramid. It sets the moral tone for all leadership under it. You don’t want a board that sets the kind of tone that the board at Lehman Brothers set. 

Ethical boards should improve their companies’ governance by being more transparent than is normal in corporate boards—they should provide clear and honest communication about the company’s practices, strategies, and risks and improve transparency with stakeholders by ensuring accurate and timely disclosures of financial and non-financial information. 

They should also implement stronger accountability measures than is the norm—measures that involve developing structures for oversight and accountability, such as committee charters and corporate governance policies that define roles, responsibilities, and procedures for monitoring and enforcing ethical standards. 

Jeannette Lichner offers her real-world view: “When someone asks me, ‘What are the traits or signs of an ethical board of directors?’ I think of several things. What is the culture or behaviors in and beyond the boardroom? How do board members interact with each other and with executives, both in and outside the boardroom? What are the bases on which decisions are made—is there enough exploration, or are decisions rushed through? Are difficult topics given sufficient agenda time? If not, what is the outcome—a decision made or postponed? How frequently does the board request more information? In discussions, does organizational purpose inform the evaluation and decision? What about the impact on stakeholders? How is profitability regarded—is it always the main focus? When evaluating decisions, does the board consider reputational risk? Do they focus on the legality or the rightness of actions?” 

And because all boards impact and influence who leads the company—both on the board itself and in the C-suite and lower ranks—ethical boards should strive for board composition that recognizes the importance of diversity, not just in terms of background but in skill sets and experiences, and they should prioritize incorporating diverse viewpoints and expertise into the decision-making process to create more balanced and inclusive governance. 

Is Your Board of Directors Ethical? Find Out in Our White Paper

The above text is an excerpt from our recent white paper, "The Ethical Boardroom: A Guide to Establishing Ethical Leadership on Boards." In this white paper, we examine the issues surrounding ethical leadership on boards and provide answers to the following questions:

• How can you determine if your board of directors is ethical?
• What are the traits and characteristics of an ethical director?
• What actionable steps can you take to improve the ethical standards of your board?

Click here to access the full white paper online or download it for later reference.

Board Services for Ethical Boards

At Stanton Chase, we’ve offered board services and nurtured ethical board members for decades. Through director recruitment, board assessment, and consulting, we’ve guided companies to ensure their leadership upholds both their culture and reputation through ethical conduct and decision-making. 

If you’re starting a journey with your board of directors towards always doing what’s right—not just what they have the right to do—we’re ready to join you. Reach out to our consultants here. 

About the Commentators

Professor Charlotte Valeur is a renowned corporate governance expert and a passionate advocate for diversity in the boardroom. With an extensive portfolio career, she has served as a Non-Executive Director and Chair for numerous public and private companies, including Laing O’Rourke, BT Pension Fund, and the Institute of Directors U.K. Charlotte is also the Founder and Chair of Board Apprentice, a not-for-profit organization that provides hands-on experience to individuals at the highest levels of business. Her expertise in corporate governance has been sought after by governments and organizations worldwide, and she regularly delivers training and conducts board reviews through her company, Global Governance Group. 

Jeannette Lichner is an experienced Non-Executive Director who has served on various private and public sector boards, as well as charitable organizations. She currently serves as Chair of Elucidate GmBh and Square 4. Jeannette’s belief in the importance of people has led her to balance her non-executive roles with teaching, executive mentoring, and coaching. With a deep understanding of functional areas gained from her executive roles in financial services firms, Jeannette provides a holistic, strategic view to the organizations she works with. She is also actively involved in sustainability initiatives as a Senior Associate of the Cambridge Institute of Sustainability Leadership, a Companion Member of the Chartered Management Institute, and a Sustainability Champion. 

About the Author

Eleri Dodsworth is a Partner at Stanton Chase London and serves as the Regional Leader for the Diversity, Equity, Inclusion, and Belonging practice group for the EMEA region. She also represents the firm on the AESC Diversity Leadership Council for Europe and Africa.  

Eleri is a passionate advocate for equity, inclusion, diversity, and belonging. She strongly believes in helping her clients build diverse leadership teams, seeing diversity and inclusion as essential values that significantly impact business performance. Eleri specializes in placing leaders at the C-suite level, divisional directors, and non-executive directors in listed companies, as well as in private equity, family-owned, and privately owned businesses.