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Ethics and Corporate Governance: Lessons Learned from a Financial Services Model

Published online by Cambridge University Press:  23 January 2015

Dawn-Marie Driscoll
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Abstract:

To achieve ethical corporate governance, directors’ first priority must be to examine their own structure and operation. If the board is vulnerable to charges of unethical conduct, it will have little credibility in its oversight role over the corporate culture of the organization. An examination of a positive model of corporate governance in the mutual fund industry provides an effective illustration of several ways to add ethics to corporate governance: 1) legislation; 2) jawboning; 3) peer pressure; 4) regulation; 5) training and reflection. While peer pressure and training are more effective than the others, all those methods taken together cannot solve every ethical lapse. Only individual board members, working together, can influence the conduct of the board and propel themselves and the organization towards a standard of continuing ethical excellence.

Type
Corporate Governance
Information
Business Ethics Quarterly , Volume 11 , Issue 1 , January 2001 , pp. 145 - 158
Copyright
Copyright © Society for Business Ethics 2001

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References

1. The Center for Business Ethics at Bentley College in Waltham, Massachusetts, for example, was founded in 1976. Its conferences, research library, executive fellows program, publications, visiting scholars and other activities, including the establishment of the Ethics Officer Association and the Society for Business Ethics, coincided with an explosion of interest in the field of business ethics.

2. The National Association of Corporate Directors was founded in 1977 with the explicit mission of enhancing corporate governance and performance of business entities. Its training programs, publications and Blue Ribbon Reports help promote high professional standards for directors.

3. Steven Lipin and Mitchell Pacelle, “Price of a Scandal? Cendant Corp. Stock Is Weighed Down by Potential Liability,” The Wall Street Journal, August 31, 1999, p. C1; Mitchell Pacelle, “Cendant Agrees to Significant Changes in Corporate Governance as Part of Pact,” The Wall Street Journal, December 8, 1999, p. A3.

4. See Dawn-Marie Driscoll and W. Michael Hoffman, Ethics Matters: How to Implement Values-Driven Management (Waltham, Mass.: Center for Business Ethics, 1999), pp. 90-103.

5. Driscoll and Hoffman, pp. 230-239.

6. “In fact, the success of our existing system of governance presents us with a heavier burden—a larger challenge—to constantly review and improve the stewardship of our shareholders’ assets” (John J. Brennan, ICI Chairman’s Report at the 1999 General Membership Meeting, Washington D.C., May 20, 1999).

7. “Moneyed Men in Institutions,” The Economist, November 6, 1999, p. 83-84.

8. See Investment Company Institute, Mutual Fund Fact Book 3 (1999). It should be noted that the $6 trillion directors now oversee, owned by 77.3 million individual investors, is uninsured money, with no possibility of government guarantees, subsidization, or bailout.

9. Ibid.

10. “Avoiding Complacency, Advocating Reform: The Commission’s Independent Fund Directors Initiative,” Remarks of Paul F. Roye before the Investment Company Institute’s 1999 Investment Company Directors Conference, Washington D.C., October 28, 1999.

11. 15 U.S.C. 80a.

12. “Maintaining the Pillars of Protection in the New Millennium,” Remarks of Paul F. Roye Before the Investment Company Institute 1999 General Membership Meeting, Washington D.C., May 21, 1999.

13. In this regard, the duty of directors of funds is different than that of directors of a public profit-making company. Mutual fund directors hire the adviser to manage the assets of the fund’s shareholders and hire the service providers (the same adviser, in some instances) to provide services to shareholders. Directors negotiate the fees paid to the adviser for such activities. The directors oversee the management of the fund, but they are not directors of the investment adviser. How the adviser runs its company, and whether it makes a profit or not, is the province of its own board.

14. See the story of the ethical scandal at the United Way of America, for example (Dawn-Marie Driscoll, W. Michael Hoffman, and Edward S. Petry Jr., The Ethical Edge: Tales of Organizations That Have Faced Moral Crises, [New York: MasterMedia, Ltd., 1995], pp. 193-206).

15. See Burks v. Lasker, 441 U.S. 471, 484 (1979).

16. Transcripts from the Roundtable on the Role of Independent Investment Company Directors, February 23-24, 1999. They are available on the Commission’s web site, <www.sec.gov/offices/invmgmt/rountab>.

17. Roundtable Transcript of Feb. 23, 1999, p. 236 (statement of Manuel H. Johnson).

18. Roundtable Transcript of Feb. 24, 1999, p. 234 (Statement of Gerald C. McDonough). See also Aaron Lucchetti, “Direct and Protect,” The Wall Street Journal, April 2, 1999, p. C23.

19. Roundtable Transcript of Feb. 24, 1999, p. 197 (Statement of Richard M. Phillips).

20. Roundtable Transcript of Feb. 24, 1999, p. 63 (Statement of Dawn-Marie Driscoll).

21. The ICI had already addressed the issue of integrity and corporate governance through its publications for independent directors, its well-regarded three-day annual conferences for independent directors, its active Directors Services Committee, and the fact that several independent directors had been elected to the ICI’s own Board of Governors. The ICI also had a track record in raising ethical standards for the industry. After one fund fired its manager for violating its rules regarding personal trading of securities, the ICI had convened a special task force to study the issue and make recommendations regarding personal trading for all fund companies, a “best practice model” of a code of ethics for the industry. Two years later, an overwhelming majority of fund complexes reported they had implemented the panel’s recommendations. Report of the Advisory Group on Personal Investing, The Investment Company Institute, Washington, D.C., 1994.

22. “In varying degrees,” the Group noted, “these practices, which go beyond statutory and regulatory requirements, have already been adopted by many investment company boards and tested by actual experience. Adoption of the recommended practices by other fund boards would bolster the effectiveness of the current system in safeguarding the interests of fund shareholders, particular in guarding against potential conflicts of interest between the fund and the fun’s investment adviser” (Report of the Advisory Group on Best Practices for Fund Directors: Enhancing a Culture of Independence and Effectiveness [Washington, D.C.: The Investment Company Institute, 1999], p. 4).

23. See such other “best practice” reports as The Dey Report from Canada (Toronto Stock Exchange Committee on Corporate Governance in Canada, Where Were The Directors—Guidelines for Improved Corporate Governance in Canada, December 1994), The Vienot Report from France (Conseil National du Patronat Francais and Association Francaise des Entreprises Privées, The Boards of Directors of Listed Companies in France, June 10, 1995), The Peters Code from The Netherlands (Committee on Corporate Governance, Corporate Governance in the Netherlands—Forty Recommendations, June 25, 1997), the King Report from South Africa (The Institute of Directors in Southern Africa, The King Report on Corporate Governance, November 29, 1994), the Swedish Academy of Directors’ report (The Swedish Academy of Directors, Western Region, Introduction to a Swedish Code of “Good Boardroom Practice, “ March 1994) and the Cadbury and Hampel Reports from the United Kingdom (Report of the committee on the Financial Aspects of Corporate Governance, December 1, 1992 and Committee on Corporate Governance Final Report, January 1998).

24. Report of the Advisory Group on Best Practices for Fund Directors: Enhancing a Culture of Independence and Effectiveness (Washington, D.C.: The Investment Company Institute, 1999), p. 10.

25. “Avoiding Complacency, Advocating Reform: The Commission’s Independent Fund Directors Initiative,” Remarks of Paul F. Roye before the Investment Company Institute’s 1999 Investment Company Directors Conference, Washington D.C., October 28, 1999.

26. Securities and Exchange Commission, Release Nos. 33-7754; 34-42007; IC-24082; File No. S7-23-99, p. 65.

27. 0ne that has done a good job is Vanguard. See <www.vanguard.com>.

28. See, for example, GM Board of Directors Corporate Governance Guidelines on Significant Corporate Governance Issues (Detroit, Mich.: General Motors Board of Directors, Jan. 1994; revised Aug. 1995; revised June 1997).