IoD conducts national conversation on its proposed Code of Conduct for Directors

The discussion included contributions from panellists – Deshpal Panesar KC, a barrister in employment law; Dr Ian Peters, Director of the Institute of Business Ethics (IBE); Liz Barclay, the Small Business Commissioner for the UK; Dr Roger Barker, policy director at the IoD; and Paul Hockley, director of ethics and compliance at BDO.

One of the key objectives for the IoD, defined in the organisation’s Royal Charter, is to promote competence and integrity on behalf of directors.

Barker said: “We’ve been aware for some time that directors lack a Code of Conduct, which is, I suppose, one of the key ways in which a framework of ethics and good conduct is structured in other professions and other professional activities.

“We have a situation where directors are simply appointed into roles and organisations and there are actually very few prerequisites for directors to become directors. The fact that we don’t have a code of conduct has always seemed an anomaly.”

He noted that although directors are subject to certain specific legal requirements in the Companies Act and other types of regulation, these fall short of being anything equivalent to an overarching Code of Conduct.

About 18 months ago, the IoD polled its members to ask whether they thought directors should be subjected to either a voluntary or mandatory Code of Conduct. Around 78% of IoD members agreed with that statement.

It was noted that high profile debacles like the Post Office Horizon IT scandal and the collapses of Carillion and BHS have added to the perception that business leaders can appear self-serving and lack accountability. This leads to a lack of public trust in business and other kinds of organisations.

The IoD believes now is the time to try and repair some of that reputational damage through the introduction of a Code, which puts directors’ behaviour and integrity at the heart of a voluntary framework of basic expectations.

Barker added: “This Code is intended to be something very distinct from the UK corporate governance code, which is primarily concerned with the structure and activities of the board as a whole. Governance codes are not aimed at the conduct of the individual director.

“We see this Code of Conduct for individual directors as being very complimentary to corporate governance codes. We also see a Code of Conduct as being complementary to the legal duties of directors, which are found in the Companies Act 2006.”

Professional Codes 

Paul Hockley from BDO, which has been helping the IoD with drafting the Code, said he and his team initially benchmarked the code against a series of non-corporate codes to see what they looked like.

They looked at codes from the General Medical Council, the Civil Service Code, and the Ministerial Code, amongst others.

Hockley said: “We looked at whether they were rules or principles-based within more ethical principles. What was the length? What was the intention behind the document? Was it a reference document? How did the code relate to breaches or consequences and what’s the inference for what we’ve now written? And of course, how does it fit in with other regulations, other laws, other codes of conduct?”

What the IoD has presented in its consultation document is a principles-based code. Hockley noted the Seven Principles of Public Life – known as the Nolan Principles, which set out standards in public life – were hugely influential in designing the Code.

“We adapted those principles to the director’s role. But the challenge for us was to write something as short as possible that added as much value as possible. It had to be strategic enough to apply to all directors and recognise the complex role that they have,” he said.

The IoD’s consultation document outlines six headline principles of director conduct: 

1. Leading by example
2. Integrity
3. Transparency
4. Accountability
5. Fairness
6. Responsible business

Each of these is backed up with more specific undertakings and a description of what the benefits might be of following through on them.

Crisis of Trust

Dr Ian Peters of the Institute for Business Ethics followed up the point about recent scandals, noting “there’s a crisis of trust” in business.

He cited a survey from the IBE, which showed 14% of the British public believe that politicians behave ethically, with only 35% who believe that business behaves ethically.

“It suggests that there is a bit of a crisis here. A burning platform that needs to be addressed,” he said.

Peters praised the IoD for establishing a Code for directors, adding: “It isn’t burdensome, it isn’t hard regulation. But it is about setting standards and seeking to change behaviour.”

Liz Barclay, the UK’s Small Business Commissioner, agreed, saying the Code would empower people to behave in the right way.

She added: “One of the first boards I ever sat on, I was absolutely prepared to resign from if I felt that I couldn’t support particular decisions. At my second [board] meeting, and I wasn’t particularly old at the time, I said, ‘this is a resigning matter for me’.

“As a result of that, it changed the entire conduct of not just the board, but the way the organisation viewed itself. I didn’t have to resign in the end, because I actually was able to make more of a difference by staying in and helping to restructure the board, helping to restructure committees of the board, helping to allow the executive team to think differently about how the whole organisation was set up. That is the power of something that wasn’t set in legislation. It was a voluntary response from me.”

Voluntary vs Mandatory?

One of the most hotly debated topics amongst the commissioners, while formulating the Code, was whether it ought to be a voluntary or mandatory set of principles.

Deshpal Panesar KC said: “I think done right, the code is going to become a badge of pride. It’s going to become a quality mark. But if you don’t have it, or if you’re not truly committed to it, it’s going to become blindingly obvious to those who might want to do business with you, to those who might want to work for you.”

Peters agreed, saying it “has to be voluntary”, adding: “Individuals within companies have to recognise that there is a real benefit to them individually and for their companies in behaving in an ethical and proper way with integrity. And the structure of this Code sets out precisely why there are benefits to people behaving in this way.”

Contagious Behaviour

Expanding on Panesar’s hope that the Code becomes a ‘badge of pride’, Barclay noted how good behaviour and setting high standards within boardrooms can become contagious.

She said: “I grew up in a background where I had self-employed parents who were also involved in the third sector, in school boards and as directors of all sorts of different organisations. And it was always behaviour that was talked about it. It was never the decisions that were made. It was never the actual business or how successful it was going to be. It was always about how people behaved, and it was always about respect. It was about trying to make sure that the right thing was done in order to get the right outcomes, but that everybody was heard and listened to.”

She noted that tempers often fray, and things go wrong when people aren’t heard or listened to, and their contribution isn’t valued.

“This is where this Code really comes into its own, because it sets out the principles but it also almost gives permission to directors to behave in such a way that they can challenge, that they do feel they have the right to be heard, that they do feel that they have the right to respect and that they are trying to build trust in the board and in the organisation,” she said.

“If there are those that are not behaving well, the rest [of the board] will feel empowered to challenge that behaviour. So, even if you end up with a board that’s half signed up, I think the contagion of better behaviour has got a power of itself.”

Peters noted that the government is in the process of scrapping the Financial Reporting Council, the financial watchdog, and pressing ahead with establishing a new regulator, the Audit, Reporting and Governance Authority (ARGA), which will have greater powers to oversee companies and pursue directors.

“I do think that in due course, when the FRC transforms into ARGA, it will be looking for ways of assessing director behaviour,” he said. “I would have thought one of the things to look at is whether a director has signed up to the Code and has adhered to the Code. So, I think there’s sort of a quasi-regulatory potential that this Code has that’s not saying we want to hamstring directors with too much regulation. “Increasingly, people will say – ‘well, have you signed up to the Code?’ And boards will say – ‘well, perhaps we should all sign up to the Code on this board’. So, in that sense, I think peer pressure has a really important part to play.”

What Next?

Following the public consultation (which ended on 16 August), the IoD will publish a final draft of the Directors’ Code of Conduct and it will be incorporated into the organisation’s professional framework, similar to other professions – doctors, lawyers, accountants etc.

Barker said: “It is our intention that it will be part of our professional framework of the Institute. Beyond our membership, it will be a voluntary commitment that directors can choose to make. The IoD won’t be in the business of enforcing the Code or investigating cases of non-compliance. It will be a matter for organisations and their stakeholders to determine how to hold directors accountable.”

The IoD also intends to incorporate the Code into its director training.

Barker added: “This will be very much one of the foundations of the IoD professional training framework, including the Chartered Director qualification.”