Good corporate ethics needs grey-area leadership, not black-and-white rules

"I asked for a workshop on ethics; and you've given me this rubbish on dealing with matters of right and wrong."

With these words from the CEO of a large law firm, so began - and ended - a discussion about proceeding with a designed set of workshops to deal with ethical issues and ethical decision-making.

Some recent comments have pointed out that problems with corporate governance persist despite an increase in regulation. Regulatory regimes are not capable of remedying what are, by and large, ethical problems.

Actually, things are even worse than this. The shortfall in ethical performance is in fact exacerbated by the introduction of more regulation. The regulation itself is part of the cause. This is a central problem.

The responses by the Institute of Chartered Accountants to CLERP 9 faced exactly this difficulty. So, too, do the ASX's new listing rules concerning companies' continuous disclosure.

In different areas, both of these are at least partly concerned to clear up ethical difficulties with new regulatory regimes.

The quote from the CEO above shows that the problem is remarkably entrenched. Not only are we trying to take care of ethics with regulation; worse, it has become the case that when corporate people think about corporate ethics, what they think about are only the rules and regulations.

One recent commentator suggested that the fear of more law is actually a better stimulus for doing the right thing than is the presence of more law itself. This is an important insight.

With a threat, we know the motive behind any threatened legislation ("clean up your act, or else"). We know the point or principle driving the legislation - for example, the desire to have auditors present a "true and fair view".

Trouble occurs when what is required for this is reduced to black-letter prescription, and is removed from the level of judgement and professional appraisal.

The result is that the focus is shifted from concern for the principle driving the legislation to concern for what precisely is required to comply with the legislation itself; or, more often, to get around the specific requirements of the legislation.

The failure of corporate governance is at the corporate leadership level. Failure occurs when those responsible for governing either fail to see what a real ethical issue is, or insist on reducing ethical issues to rules and regulations, algorithms, and black and white, as though that is the only way such things can be dealt with.

The situation with accountants is but one example of a general problem of trying to spell out grey in black and white, as though there could be a simple formula for matters of good judgement.

Although they have been in the spotlight for their systematic ethical shortcomings, accountants are by no means alone in displaying this ill-advised reductionist strategy.

At all levels of management in the corporate world (beginning with the board, and extending to all those with managerial responsibility), there is simply no escaping the responsibility for exercising good judgement, for which people are then held accountable.

Focusing on accountability systems alone runs the danger of missing what should be the central target. Trying to replace responsible judgement with rules, regulations, and allowing for the ethically blinkered position of the lawyer CEO, is as close as we can get to a recipe for failure at good corporate governance and ethically informed, responsible decision-making.

Here's a call to arms: directors need to show leadership. They need to assume control of the corporate culture, starting with a review of their own ethical standards and beliefs.

Only by instilling corporate values that clearly authorise and encourage ethical behaviour and just as clearly discourage unethical performance can headway be made at remedying an environment ripe for corporate failure.

Reliance on more black-letter law and regulation will not solve the problem, and runs a substantial risk of making it worse.