Corporate governance scandals across the globe have led many to ask, “Where were the directors?” The usual response to corporate governance failure is increased regulation. Governments typically resort to tightening regulations around director independence and codes of ethics.

But what of the role of the personal ethics of directors? Our study has found that directors’ personal moral values are a powerful driver in their decision-making because their moral values are fundamental to directors’ identity.

Performance appraisals and director selection processes could make a more effective contribution to best-practice governance by indicating that “proven moral integrity” is the most important measure of success.

Personal values

The potential impact of personal values on decision-making and behaviour in the business context has been the subject of much scholarship. In the literature, values are commonly defined as concepts or beliefs about desirable end states, or behaviours that transcend specific situations, guide selection or evaluation of behaviour and events, and are ordered by relative importance.

This definition distinguishes between personal non-moral values and personal moral values; the former are guides for selection while the latter are guides for evaluation. Schwartz’s values theory defines ten broad values: self-direction, simulation, hedonism, achievement, power, security, conformity and tradition, benevolence and universalism, and are clustered in four groups according to their underlying motivation—-openness to change, self-transcendence, conservation and self-enhancement.

Studies to date tend to compare participants’ rankings of pre-crafted moral constructs (values) with participants’ answers to various scenarios. Conclusions are drawn based on which types of values lead to which types of decisions.

Overall, these studies find a positive relationship between personal moral values and ethical decision-making. Some scholars criticise this method of researching morality because pre-defined values are imposed on the recipients and it is very removed from the complexity and messiness of the decision-making context.   The current study did not impose any values content on the participants but rather allowed this to emerge from the interviews.

Reform

The traditional approach to corporate governance reform internationally centres on the role of the independent director since, according to agency theory, more independent oversight of management is better than less.

This method of reform has encountered heavy criticism because of ineffective outcomes and contradictory findings: there is no conclusive evidence to indicate that having more independent directors leads to better financial performance.

There is a small body of academic literature which suggests that the recent failures in corporate governance are fundamentally caused by a lack of personal morality rather than deficiencies in the structural framework.

These authors argue that regulation and codes of ethics, of which there is no shortage, are not sufficient as a means of ensuring ethical behaviour; what is needed are ethical people. This is because personal ethical beliefs and character are the strongest drivers of ethical action. The claims of these scholars are supported by the studies to date on personal values mentioned above.

The study

Our study was crafted on the assumption that personal values do influence behaviour and ethical decision-making, but sought to enrich the understanding around this relationship; specifically with respect to “how” and “why” personal moral values influence behaviour. Data was gathered through semi-structured interviews of 33 New Zealand directors.

One theme that emerged was that directors’ personal moral values seemed to be the determining factor in their ethical decision-making.

The following quote gathered from a director during the interviews reflects this idea: “I think my personal integrity is much more important than a particular directorship. So if it comes to it [choosing between my personal integrity and the position], there is no choice in my mind. I have resigned from a board where I felt that.”

This theme provides a powerful support for those corporate governance scholars urging reformers to give more attention to the personal moral values of leaders to attain ethical governance.

The findings also lend credence to the argument that personal moral values contribute to the effectiveness of the structural aspects of governance, such as a code of ethics.

Some typical quotes were: “Codes of ethics are only useful if people’s personal values systems align with them, otherwise you get disinterest.” And: “You can legislate for ethics, you can put all the rules you like around people, but they either have that internally or they haven’t; that internal compass or those internal standards.”

Many international bodies recommend that boards of directors develop and implement ethical codes. But the findings of this current study suggest that personal moral values are just as, if not more important, than codes of ethics for the attainment of ethical corporate governance.

Another major theme that emerged relates to “why” adhering to personal moral values in their governance work may be so important for directors.

It was found that directors believe adherence to their personal moral values is linked to their identity. Comments included: “Your personal values are what you live by in whatever sphere of life you are…it is just the way you are, your modus operandi. I think your values touch different parts of your life.” And: “I think some of it [ethics] comes down to the person that you are; actually I think a lot of it does.” Also: “I didn’t want to defend YYY [a product], it just was inconsistent with who I am.”

It is well established in psychology literature that adherence to one’s personal values is core to one’s personal identity or sense of self; in fact “identity consistency” is a key component of personal identity. This helps to explain why personal moral values are so important to a person—consistency is basic to one’s identity.

Conclusion

This study reveals how and why directors’ personal ethics are important in their task of governance.

It demonstrates that they are extremely influential in their ethical decision-making because they seek identity consistency. Furthermore, the study provides impetus to those calling for more attention to be given to the personal ethics of directors in order to achieve best-practice governance.

Consequently, the demonstration of ethical competency should be a key performance indicator in director appraisals. Selection processes should require that equal weighting be given to proven moral integrity alongside other skills and competencies.

Dr Patricia Grant is a senior lecturer at the Auckland University of Technology in New Zealand.

The full article can be found at http://www.emeraldinsight.com/doi/pdfplus/10.1108/CG-03-2016-0046.