#EthicalBusinessPractice

The IoD Centre for Corporate Governance is running a Public Inquiry: Governance & Innovation – Call for evidence – the deadline is the 31st of August 2022 and I encourage you to have your say. To get you thinking, here are a couple of my answers to their timely questions around regulation.

Apart from rules and codes. are there any actions regulators and policy makers could take to encourage innovation?

Policy makers and regulators alike should recognise that the answer to every ethical failure isn’t more regulation but better regulation – well drafted, evidence based, proportionate and outcome based.  And, the focus of regulation should pivot to encouraging both the regulators themselves and the businesses they regulate to focus on developing a culture that supports innovation, which is the same thing as saying a healthy (ethical) culture.

The UK Corporate Governance Code and the Wates Principles highlight the role of the Board in terms of purpose, culture and strategy and the alignment of these.  This is an important step in the right direction when it comes to encouraging purpose-driven innovation. But it means that Boards must understand the culture of their organisations and the actual values that motivate people to act as they do. Key elements to support innovation are a focus on values  and purpose, a psychologically safe environment supported by the use of cultural measuring tools such as Barrett Analytics to assess culture (which they are required to do in one way or another).  In this way the Board will know whether the culture is evolving the attributes it needs to  support innovation and when behaviours are creeping in that may stifle it.

Ethical Business Regulation[RS1]  calls for regulators to have a variety of possible interventions to encourage and support business rather than simply enforcing against them when they fail. Traditional compliance and enforcement will stifle innovation by discouraging risk taking and incentivising people to be less than candid about the elements of failures. Based our experience and research, the approach outlined in Ethical Business Regulation would create a more trusting relationship – and support businesses to take the risks necessary to innovate.  In the event of a mistake or failure,  their ability to provide evidence that they were striving to nurture a healthy ethical culture should influence the choice of regulatory intervention. A culture where people are more likely to be open about mistakes and failures and learn from them is crucial. A psychologically safe environment in other words, is one where innovation can thrive.

It is a mistake to think that an innovative culture is somehow different than an ethical culture or a healthy culture or a safety culture for that matter. These characteristics are all created by the same things: conscious culture management, ethical decision-making and behaviour based on authentic values, linked to purpose and nurtured by skilled leadership who embody these values. It is not only about the board having oversight on “what innovative activity” is going on in a vacuum. The board itself and the management must be creating and supporting the type of culture mentioned above – one where employees can make mistakes and even fail, so long as they can openly admit their mistakes and do proper root cause analyses to understand what went wrong and learn.

It is often the board and management that behave in such a way – blaming and criticising rather than encouraging learning and being curious – that stifles innovation. Of course, intentional unethical or illegal activity should be dealt with accordingly – hence the description, “just” culture. 

Those are my thoughts on just one of the many great questions in the Public Inquiry: Governance & Innovation – Call for evidence. What are yours? Be sure to submit your response to the before the 31st of August 2022.

P.S. For reference, below some further thoughts that help illustrate elements needed to align purpose and values to a both innovative and ethical culture. Download: Ethical Business Practice & Regulation – A new paradigm for business and regulation – and for those who want to dive even deeper, specifically Chapter 9 of the book which is titled The Status of Corporate Governance, and within that there is a section entitled The Mirage of Maximising Shareholder Value and also a section called Can Corporate structures Impede Ethical Behaviour, which discusses Colin Mayer’s views in this context and in turn there is a section that is somewhat self-explanatory / auto-intuitive: Ethical Structures Tend to Be Open and Flat.

Last but not least – the subtitle of Amy Edmondson’s useful book The Fearless Organisation is: Creating Psychological Safety in the Workplace for Learning, Innovation, and Growth.