12
Diversity, governance, and ethics

This chapter delivers the essential concepts needed to understand and communicate the diversity, governance, and ethics aspects of your corporate responsibility program.

Action indeed is the sole medium of expression for ethics (Jane Addams).

Diversity: the art of thinking independently together (Malcolm Forbes).

So far this book has covered the “bread and butter” issues at the center of the corporate responsibility profession. But there are equally important issues that are included in the definition of a responsible company. If you study the Global Reporting Initiative (GRI) guidelines you will see a number of questions aimed at the diversity of the company’s workforce, the governance structure (as well as compensation), and corporate ethics policies.

Like the previous chapters, I won’t attempt to dive into each of these topics in great detail but instead provide an overview and practical tips that you can apply in real-world settings. Remember, the corporate responsibility manager has to work with a wide variety of functions that cut across multiple business units within the company. For most of these functions, you will have limited expertise and no direct authority over how the function is managed.

Diversity

Diversity in the workplace is a sensitive and complex topic and there is an entire library of books dedicated to the subject. Diversity is sensitive because it can appear to employees that the company is trying to practice social engineering on the workforce by favoring some groups over others to make up for past discriminatory practices. After all, the messages that most companies send to their employees is that they will be judged by the merit of their work not attributes they cannot control such as race, gender, or sexual preference.

So, why do so many companies have a diversity program? There are several answers to this question. The first is business value. In the library of diversity books you will find study after study showing that diverse groups of people produce better business results. Once this data started to enter the corporate consciousness, some companies started to count the numbers of their employees in each demographic category to see if they had a diverse workforce. Depending on the business, the numbers likely did not match the proportion of these groups in the general population – meaning that the company had been hiring a disproportionate number of a certain group compared with the demographics of the available hiring pool. Often, the lack of diversity is even greater at higher levels of management within the company (including the board of directors).

If the data are skewed toward one or more demographic groups, most companies will examine their hiring and promotion practices to ensure that there aren’t any overt biases being applied. Even if no bias is discovered, many companies will seek to take steps to adjust the imbalance through affirmative action policies that give preference to underrepresented demographic categories such as females or people of color.

Because it is easy to count, tracking the proportion of each demographic in your workforce is the lowest common denominator for diversity management programs. For example, in AMD’s latest corporate responsibility report the company disclosed the proportion of females in senior management (11%) and the percentage of females in the overall workforce broken out by region (ranging from 20 to 43% – fairly typical for a technology firm).

Effective diversity management is far more complex than counting percentages. There are many different categories of employee attributes that, when mixed together, can form a diverse and productive work culture. Diversity managers break down the mix this way:

• Core (personality). Companies are interested in the fundamental characteristics of employee behavior in the workplace. These core characteristics are often measured by personality inventories such as the Myers-Briggs Type Indicator^® (MBTI). Understanding personality traits is useful because the data can indicate who is compatible with whom in workplace team situations. For example, when I had my team take the MBTI at Intel, the lesson was that the people on the team processed information very differently.⁸⁸ While we didn’t take this exercise to the next level by rearranging work teams based on personality type, this very simple reminder helped us ensure that all voices are heard and included in team processes

• Primary (age, ethnicity, gender, race, sexual orientation, or physical ability). These are the traditional demographic definitions of diversity. These categories are important because each of these groups is a legally defined protected class – meaning that if discrimination against employees in these classes is proven, the company can be liable for damages and penalties. While many companies track data on how many people are in each class, most do not report it publicly. While the data is useful as a gross indicator of diversity, it does not tell you enough about what is really going on in the workplace

• Secondary (religion, language, work style, education, work experience, relationship status, recreational habits, family/parental status). With the exception of religion, relationship, and family status, most of these attributes are not within legally protected classes and, thus, are almost never tracked in any formal sense. Nevertheless, these factors can be critical from a diversity and inclusion perspective. For example, there are strong cultural sensitivities regarding religion in some countries where your company may conduct business. Being aware of these sensitivities and managing them well is an important aspect of your company’s diversity program

While there may appear to be an element of political correctness in diversity management, the ultimate goal of the diversity and inclusion program is to get the most value out of your company’s workforce. Again, the data suggesting that there is a business value in diversity and inclusion is strong. For example, the top 50 companies in Diversity Inc.’s Top 50 have a 25% greater shareholder return than the S&P 500 average.⁸⁹ Catalyst (catalyst.org) reported that companies with the most women in top management have a 35% higher return on equity and a 34% higher total return to shareholders than the companies with the fewest women in top management.⁹⁰

AMD’s diversity director, Deb Nations, told me that “diversity is not about counting heads, it’s about making heads count.” What she meant is that diversity practice has matured from quota-based management (counting heads within each group) to finding ways to include diverse perspectives from across the spectrum of employee characteristics. It is about building employee relationships to improve group performance and productivity, and fostering the flexibility and the agility needed to adapt to changing markets and consumer preferences. Consumer product companies in particular have figured out that if their workforce – and especially their management – does not match the overall demographics of their customer base, then they are likely to misunderstand their market and lose business.

Truly effective diversity programs look at their workplace demographics and how the people in their workforce are treated. In other words, diversity is the mix, while inclusion is making the mix work. While a diverse employee population might look good in your corporate responsibility report, the real business value is unlocked when the broad range of backgrounds, experience, and skills are included and their creativity is leveraged into business decisions.⁹¹

Governance

Governance refers to how your company is managed, including its structure, policies, executives, and directors. The items of importance from a corporate responsibility standpoint are:

Independence

Investors are particularly interested in whether the board is independent from the executive management of your company, meaning that they exercise meaningful oversight over the finances, strategies, and operations of a company, rather than simply rubber-stamping management’s plans. Several GRI questions are focused on board independence: for example, “State the number of (board) members that are independent or non-executive” and “Indicate whether the Chair (of the Board) is also an executive officer.” The New York Stock Exchange has established specific standards for the independence of board members.⁹²

Environmental and social governance (ESG)

The ESG concept is based on the belief that if the charter and structure of your company includes environmental and social issues, the company is more likely to achieve progress on these issues.

This concept is illustrated by a 2010 shareholder resolution filed by Harrington Investments to amend Intel Corporation’s bylaws to create a board committee on sustainability. Intel initially opposed the resolution but eventually agreed to change the charter of one of its board committees (Governance and Nominating) to include oversight of sustainability. The theory is that the additional attention and oversight from a board committee will improve the company’s level of sustainability performance. Notably, the GRI guidelines ask companies to disclose which board committees have “direct responsibility for economic, social and environmental performance.”

The ‘B’ corporation

On January 1, 2012 a new law in the State of California came into effect that created a new corporate governance structure allowing corporate directors to consider social and environmental considerations on equal footing with financial returns. Before this law came into effect, shareholders could sue corporate boards if the company took on costly environmental or social initiatives instead of maximizing profits.⁹³

The companies that incorporate under these laws are often called “B” corporations, which is short for “benefit” corporations. Similar laws have now passed in six other U.S. states and companies are beginning to sign up.⁹⁴

In California, the designation under the new law is called the “Flexible Purpose Corporation.” Flexible purpose corporations write a social or environmental mission(s) into their articles of incorporation. For example, one company may be interested in preserving water supplies, while another may set its mission to eliminate labor abuses in its supply chain. The law requires the company’s directors to consider these social or environmental missions their decision-making, even when it could mean lower returns for investors.

One of the first companies to sign up was Patagonia – maker of outdoor clothing and gear. Patagonia has a long tradition of promoting environmental and social causes and created a big splash in late 2011 with its “common threads” advertising campaign. In a full-page New York Times ad, the company asked consumers not to buy their products if they could reuse or recycle older gear.

My friend, and longtime proponent of the benefit corporation structure, Suz Mac Cormac (Partner with the San Francisco law firm Morrison & Foerster), is working with several companies beyond Patagonia that are considering utilizing the flexible purpose corporation option. Whether or not the “B” corporation takes off with major brands is still unknown, but it presents an attractive alternative for corporate governance that allows social and environmental considerations equal standing in corporate governance.

Policies

To demonstrate strong governance, most companies will list the relevant corporate policies in their corporate responsibility reports. Examples of these policies include: the principals of corporate governance, standards of business conduct, code of business ethics, stock ownership guidelines, and the supplier code of conduct. Each of these policies sets out the company’s expectations with regard to its employees’ and suppliers’ conduct involving ethical, social, and environmental issues. In many instances, legal requirements such as the Sarbanes–Oxley Act, the Foreign Corrupt Practices Act, and a long list of labor laws dictate the content of these policies. It is important to understand all of your company’s policies that pertain to social, environmental, and ethical concerns.

Procedures

Policies are only effective if they are actually implemented and their compliance is monitored. Corporate responsibility reports will usually include a list of business practices and corporate structures aimed at implementing governance policies. Examples of these procedures and structures include: the audit committee of the board; the internal audit department; the internal controls, compliance, and investigations organization; the risk management and business continuity office; employee alert lines and the processes to respond, investigate, and resolve complaints as well as whistle-blower anonymity and anti-retaliation procedures. One of the more common ethics procedures is mandatory training. Most companies will require ethics training and track compliance with the requirement.

Probably because of increased scrutiny, many companies now have fairly robust structures with sizable teams and established business practices to ensure conformance to ethics laws and company ethics policies. Ensure that you have a firm grasp of these procedures so that you are able to communicate them as a facet of your company’s overall corporate responsibility program.

Stakeholder engagement

Chapter 10 delves into the practice of stakeholder engagement, but this topic is also included in most governance questionnaires. For example, in the governance and engagement section, the GRI guidelines ask companies to describe “Key topics and concerns that have been raised through stakeholder engagement, and how the organization has responded to those topics and concerns, including through its reporting.”⁹⁵

The concept behind this area of governance is the inclusion of stakeholder perspectives into business decisions. Leading companies in CR have specific procedures for including stakeholder views within a defined scope of ESG issues.

Governance is one of the topics that the corporate treehugger has to know about but typically has very little influence over. The decisions regarding corporate governance usually take place within the highest echelons of the corporation. The good news is that you will get to interface with these senior people as you seek to understand and report on the governance policies and structures of your company.

Another bright spot for the corporate treehugger in the governance area is the increased focus on sustainability from the board of directors and senior management. As the above example from Intel demonstrates, many external stakeholders are demanding that company leadership have more awareness and ownership of corporate responsibility issues. In practice, this means that you may be asked to assemble information into presentations summarizing your programs, progress, and plans for senior management and/or the board. Some companies have made this into a formal function within the executive ranks but, as of today, these companies are a minority. Most boards and executive teams are focused on the more traditional measures of business success: profit and loss, business strategy, investors, customers, products and services, and research and development.

If you are called upon to interface with executive management and/or the board on corporate responsibility, work on making the information relevant to their paradigm. First, think through your main messages and boil them down to their essence. Start your presentation or written summary with the key messages and then fill in the details if appropriate. Remember, people at this level will have little time or attention span for a lot of background or detail. Another tip is to tie the corporate responsibility information to relevant business issues. Porter and Kramer’s 2006 article “Strategy and Society”⁹⁶ is an informative guide to why and how corporate responsibility is more effective when it is tied to the core competencies of the business. Senior leadership will likely glaze over, or worse, become antagonistic, if you present your program as “the right thing to do” or simple charity. Every issue you present should have a clear, compelling, and quantitative (if possible) benefit for the business.

Ethics

The term “corporate ethics” will often elicit a few laughs as an oxymoron. People tend to think that companies are driven only by the profit motive and will do whatever it takes to make money without regard to values or morals.

Like most stereotypes, this view exists because it is based on a kernel of truth. If you look under the hood, most companies have probably cut some corners or skated close to the edge of the law at some point to conduct their business. As mentioned earlier, there are a slew of legal and regulatory requirements that have been issued in response to notorious ethical lapses. The Sarbanes–Oxley Act – issued in the wake of the Enron collapse – protects corporate whistle-blowers and requires companies to establish employee hotlines to report fraud. The Foreign Corrupt Practices Act regulates and requires reporting of “facilitation payments,” which are part of doing business in many countries around the world. The recent Dodd–Frank Wall Street Reform and Consumer Protection Act seeks to protect investors against the excesses of the financial community that were so evident in the financial crash of 2008–2009. And these are only a few of the regulations and requirements focused on corporate ethics.

So, with all of these laws and regulations in place, how does a corporate treehugger deal with ethics issues? First, take inventory of the items you will need to report in your corporate responsibility report. For example, the GRI guidelines ask for the “percentage of employees trained in the organization’s anti-corruption policies and procedures.”⁹⁷

After you assemble all of the GRI questions that concern corporate governance and ethics, set up meetings with your company’s corporate ethics officer and corporate secretary to discuss how they may want to respond to these. You may find that the ethics officer is interested in telling a more holistic story behind the ethics policies and practices of your company. Many companies have made substantial investments in this area and will be justifiably proud of their programs. For example, AMD has adopted a leadership role with regard to the issue of fair and open competition as an outcome of the company’s struggles with Intel, and this program has been a feature of the annual CR report for several years.

There are several ranking and rating schemes that focus on ethical performance such as EthicalQuote by Covalence (ethicalquote.com), Ethisphere’s World’s Most Ethical Companies, and the Ethibel Sustainability Index. The issues covered by these ethics ratings include:

• Product liability

• Antitrust

• Bribery

• Harassment and discrimination

• Government contracting

• False claims; marketing and branding

• Environmental, health, and safety violations

In the past, most companies were not overly candid about ethical lapses and violations. Increasingly, however, companies are self-disclosing ethical lapses. There are real incentives for self-disclosure as most of the applicable laws contain steep penalties for unreported “known violations” – where the company knew there was an issue but did not disclose it to the appropriate authorities.

Of course there are plenty of gray areas in business ethics. For example, a sales team may be under pressure to sell enough products so that the company can achieve its revenue target before the close of the quarter. This team might use leverage with a customer to “pull-in” some orders before the end of the quarter. Is this an ethical violation? The answer to many questions like this is, “it depends.” This is why many companies now have a chief ethics officer to make these types of determination on a real-time basis. While many companies report on their ethics policies, investigations, enforcement structures, and training in their corporate responsibility report, fewer are also reporting on the number, severity, and resolution of violations.

The corporate treehugger’s job is to understand your company’s ethics policies, procedures, and performance, and to represent this information to external stakeholders. It is a great idea to start the ethics section of your report with a statement from a senior corporate officer with responsibility for ethics (your company’s general counsel is ideal). This statement will reinforce the importance of ethical behavior as an expectation emanating from the top of the company. It is critical that these leaders also “walk the talk.” Even small lapses can create the perception of inattention to ethical issues, which may lead people to believe that they have tacit license to cut corners. Part of your job in corporate responsibility is to communicate a strong culture of ethics and compliance internally and externally to your company.

Conclusion

A former boss once said to me “one ‘aw crap’ trumps 1,000 ‘attaboys’.” Ethical lapses can crush a company’s reputation and overwhelm all of your hard work on corporate responsibility issues. The press loves a scandal and will relentlessly hound a company when there have been real or perceived ethical lapses (examples include: the HP board and CEO scandals, Toyota’s safety issues, the BP oil spill and safety issues, Intel’s antitrust violations, and Goldman Sachs’s behavior in the mortgage meltdown). While the corporate treehugger will not typically have a direct role in these issues, it is crucial that you understand your company’s ethics reputation and adapt your communications and programs accordingly.