MORE THAN JUST EXPRESSION: It’s about underlying behaviours that create an ethical — or unethical — organisation
WHILE directors need to be brave enough to have the right conversations, "tone at the top" is not just about saying the right things. It's more about the underlying behaviours that create an ethical - or unethical - organisation.
The expression continues to gain currency off the back of a series of damaging corporate scandals, such as Olympus in Japan, the Australian Wheat Board (AWB) and Centro Properties in Australia.
Each provides a case stu-dy in how the culture from the top influences the ways an organisation takes and manages risks to fulfil its over-arching vision and strategy.
In the case of AWB, the orga-nisation was found to have paid around US$300 million (RM981 million) in kickbacks to the Iraqi regime, prior to its collapse, by secretly inflating contract prices and sending fraudulent invoices to the United Nations.
The subsequent high-level inquiry found that, from the outset, AWB was willing to do whatever was necessary to retain its monopoly of the Iraqi wheat trade - even if it involved fraud and corruption. The inquiry attributed this behaviour to "a failure in corporate culture" because of "a closed culture of superiority and impregnability, of dominance and self-importance".
Unfortunately, this saga shows the dangerous repercussions of what happens when there is an ethical misalignment of what directors and senior management publicly say, and what they do.
AWB's company value was argua-bly destroyed from its "tone at the top". In the lead up to the release of the inquiry, AWB's share price drop-ped to around US$2.50 from previous highs of over US$6, before it was taken over at US$1.50 per share by a Canadian company.
"Tone at the top" isn't just about guarding against fraud and corruption. It can also involve dealing with complex tensions around strategic priorities and asking the tough questions to effectively manage an organisation's risk.
These important, yet more subtle aspects of "tone at the top" are illustrated by what's known as the Centro Case in Australia.
In a landmark Australian legal decision, the Federal Court of Australia found that eight directors of Centro - an Australian property management company - failed to ask the tough questions that would have most likely uncovered disclosure problems surrounding billions of US dollars of short-term debt.
The judgement of the Federal Court found that if the directors "had understood and applied their minds to the financial statements and recognised the importance of their task, each director would have questioned the matters not disclosed".
For Centro Properties, the "tone at the top" didn't translate to a culture of asking open questions around key aspects of financial risk. The business experienced a near fatal collapse, with its share price dropping from over US$5 to just 80 cents in a matter of days.
Despite both AWB and Centro subsequently restructuring into different businesses, these behaviours left a long and lasting legacy for new leaders to distance themselves from and for the rest of us to learn from.
So, what's the take-out message? Is it "tone at the top" can't stay at the top?
"Tone at the top" has to be a driving force for every aspect of an organisation - from the board table to the management suite and beyond.
It is about paying attention, role-modelling, expecting and rewarding ethical and responsible behaviour and creating an open culture that sets acceptable standards for how people go about taking risks to fulfil an organisation's over-arching vision and strategy.
After all, the right tone can provide a powerful shield against many ills such as fraud and corruption, inefficiency, complacency and loss of innovation; the wrong tone can damage, or even destroy a business.Alex Malley
is chief executive of CPA Australia