Three simple questions for ethical decision-making for Non-Executive Directors.
Being a Board director is a serious responsibility, not least of all because Board directors can be held personally liable for any loss, damages or costs sustained by the company. This responsibility derives from the Duty of Care requirement in Company Law which is codified into the statutory provisions in the Companies Act. Given the complexity of the legal framework, the simplest and most effective way to embrace this responsibility and ensure ethical decision-making is to apply the ‘business judgement rule’. In a nutshell, it involves asking yourself the following three questions when about to make a decision:
• Have I obtained all the information I need relevant to making this decision?
• Am I feeling conflicted in any way when making this decision?
• Do I have a rational basis for believing that this decision is in the best interests of the organisation?
The beauty of these three seemingly simple questions is that they serve as a test of the ethics, values, and emotional intelligence of Board directors, as well as a test of the maturity of the organisation. Let’s break them down.
Have I obtained all the information relevant to making this decision?
In making strategic decisions, Directors are often confronted with a fait accompli from Management expecting the Board to ratify their favoured outcome. As a consequence, the Board submission may be (wittingly or unwittingly) skewed in favour of this outcome and may obscure or downplay the negative repercussions of the decision. A mature Board director will consider the proposal from multiple perspectives and obtain expert input where required or request additional information before being pressured into making a hasty decision. This requires independence of mind, clarity of thought, and ethical leadership to reach a balanced decision in the best interests of the organisation.
Am I feeling conflicted in any way when making this decision?
While the legal basis for defining a conflict may be quite narrow, the question being posed requires a level of self-awareness and self-reflection that strengthens the ethical governance framework of both the individual director and the Board as a whole. Even when a Director is not conflicted, this question allows for a re-appraisal of the nature of one’s relationships with key stakeholders (management executives, fellow directors, staff, industry leaders etc.) before ensuring that these relationships do not unduly influence the decision-making process in any meaningful way.
Do I have a rational basis for believing that this decision is in the best interests of the organisation?
It’s surprising how often important Board decisions are taken without allowing for serious introspection, debate and dialogue. This is due to the nature of the Board’s functioning and the impact of extraneous factors. Because Boards meet infrequently, and Directors are dependent on the quality of information provided by management, the decision-making discussion tends to be framed quite narrowly and focuses on what is being presented and not necessarily on the entire scope of the proposal. In fact, there is often uncertainty about precisely “what” is being decided upon. Some of the extraneous factors inhibiting the decision-making process include time constraints (both in terms of meeting duration and time available to review the Board Pack), as well as the nature of boardroom dynamics. Once again, a mature Board director needs to consider all these factors and be crystal clear on the decision they have taken and the reason(s) for their individual agreement (or disagreement) with the decision. In this way, they will be able to clearly articulate the rational basis for their decision.
What if a decision turns out to be ‘wrong’?
Finally, with the benefit of hindsight, it will always be possible to identify a specific Board decision and retrospectively determine whether or not it was in the best interests of the organisation. However, as long as the Directors passed the three tests of business judgement, they will have fulfilled their fiduciary obligations. While the intention of the business judgement rule is to limit decisions that have negative consequences for the organisation, it does not expect Directors to be omnipotent adjudicators who never err. This is in itself an acknowledgment and a humbling insight that many Board directors need to reflect on as they continue their journey in the Boardroom.