How Do Directors Deal With Ethical Dilemmas?

You don’t have to look hard to find examples of boards of directors behaving badly. The lapses at Enron are well documented. So are those at Volkswagen and Wells Fargo, to name a few.  

But not all boardroom breaches are as cut and dried. They don’t all concern clear legal or formal governance rules. In many cases, the ethical tensions that directors face aren’t black and white. They’re various shades of grey and typically escape official rules, says Bertrand Malsch, the PricewaterhouseCoopers/Tom O’Neill Fellow of Accounting at Smith School of Business.

“Think of situations like a board chair not communicating all the information asked by another board member. Or powerful CEOs with strongholds on boards,” Malsch says. “These problems might not be illegal, per se, or breach any rule, but they can be problematic for directors.” So, how do directors deal with these messy, day-to-day ethical challenges?

That’s the question at the heart of a chapter [called “Tactical ethics in corporate governance: practicing assertiveness and patience”] that Malsch co-wrote with Marie-Soleil Tremblay, a professor of accounting at the École nationale d’administration publique. It appears in the forthcoming publication Research Handbook on Accounting and Ethics, and is based on 15 years of research and interviews with over 100 board members from public and private sector organizations.   

Malsch and Tremblay argue that successfully managing these everyday ethical challenges involves what they call “tactical ethics”. That is, board directors try to find a balance between assertiveness and patience.

Smith Business Insight recently spoke with Malsch about tactical ethics, the threats to boardroom ethics, and what he hopes directors take away from his research. Here’s what he told us.

You say that one potential threat to ethical practices in boardrooms is the perception of expertise. Can you explain?

Expertise has become a very important theme for boards. They want experts with a lot of knowledge on defined topics. Financial expertise is a good example. This makes sense, but the issue is that it can create power imbalances where it’s difficult to have discussions and deliberations. There is a lot of value and power that can be attached to that expertise. So if one or two people [in board meetings] are the experts in a certain area, other board members might feel uncomfortable questioning them. But boards need that culture of questioning and collective deliberation to make the best decisions.     

You also say that perceptions of service can threaten ethics in boardrooms. What do you mean by this?

The literature shows that board members don’t like conflict and many see their role as service-oriented or “giving back”. But directors play important monitoring functions as well, which can involve confrontation, because this is where you ask questions, this is where you challenge. And in ethical matters, it’s often necessary to raise uncomfortable issues. But if you see yourself as just there to serve, there is great potential for ethical problems to not be addressed.

So, where does your idea of tactical ethics fit in?

Tactical ethics is really tackling the problem of what to do when you identify an ethical problem. We used this wording because you have to strategize your ethical response to an ethical problem. You need to carefully think about what you can do, how you should do it, and when to do it. And both assertiveness and patience are key. So, OK, there is a problem, you see it, and you need to be assertive about tackling it. But on the other hand, you have to wait for the right moment to be vocal, to make the right move.

It sounds like tactical ethics can be a very delicate balance.

It can, because if you’re overly patient, you can end up doing nothing. But if you’re overassertive, you can escalate a problem. It can take time to identify or disentangle all of the different dimensions of ethical problems, so we argue there is a really fine balance to maintain between these two dimensions.

You also argue that tactical ethics has to be evaluated in terms of outcomes. What’s the risk of not doing that?

Well, the risk is that you don’t do anything to deal with an ethical problem. If you’ve identified an issue, there needs to be an outcome. You need to be able to say, “Here’s my action as a result of the ethical problem identified.” That’s really important as a way to ensure that these sorts of strategy games end up somewhere. It doesn’t just stay as a game where nothing happens and you’re just strategizing in your mind.

So, how do boardrooms make sure something does happen? In other words, is there a specific type of boardroom culture that can foster the practice of tactical ethics?  

The culture has to be one where directors feel there is a climate of open communication. The board chair plays a very important role here, especially in both allowing open access to information and then allowing the sharing of that information. If these two dimensions aren’t there, then directors won’t be able to practise tactical ethics.

You’ve spent a lot of time and energy on this research, Bertrand. What do you hope are the biggest takeaways?

One of them is that we want to move the conversation from being mostly about those defined legal or formal governance problems to the more grey ethical ones that directors are faced with. With the former, you’re forced to act on them. With the latter, you can ignore them. But they’re real problems that can have huge implications. We hope another big takeaway is addressing what to do about these ethical dilemmas. That question is largely absent from the literature and from the training that board members receive. They may be told about the problems they could face, but the solving part isn’t really addressed. Hopefully this chapter helps move that needle.

A copy of the book chapter cited in this article, “Tactical ethics in corporate governance: practicing assertiveness and patience”, is available upon request from Professor Malsch. Please email Smith Business Insight at smithinsight@queensu.ca to receive a copy. Use the subject line “Tactical ethics” in your email.