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Trust and integrity in corporate governance

I served on a panel this week with the CEO of a financial institution, among other panelists. We were talking about compliance with emerging governance regulations. The audience was primarily lawyers. Towards the end of the discussion, the CEO made a brief remark about the importance of trust on a board. “Trust is not in any of the regulations,” he said. Quite true. We didn’t have time to elaborate during the panel, but I want to expand on this issue by defining trust and integrity and outlining three types of governance relationships requiring trust, with examples, below.

Trust is crucial in a board environment to promote transparency and accountability. Without trust, there are gaps in oversight and information flow. Decision-making failure can result.

Trust, however, is underpinned by personal integrity. Integrity is the building block of trust.

“Integrity” has a very specific meaning in the governance context. “Integrity” means consistency between what a director says, writes and does. It means authenticity, candor, reliability, confidentiality, solidarity, and a willingness to accept personal accountability and be bound by board decisions and a director’s own role within them.

Most importantly, “integrity” means putting the interests of the organization above your own, and even putting your own reputation or that of the organization at risk in doing so. It means having the courage to take significant principled action when necessary, for the ultimate good of the company. “Integrity” also means using power appropriately and always acting in a way that withstands the harshest scrutiny. Integrity is one of the highest bars in the governance game because the opportunities for self-interest and enrichment are so plentiful.

If a manager or director has defects in integrity, in any of the above examples, others will not trust them.

There are at least three major types of trust in the governance context: (i) Board-CEO, (ii) CEO-C-Suite, and (iii) Director-Director trust.

(i)       Board-CEO trust

First, the board needs to trust the CEO to bring full disclosure and transparency into the boardroom. The CEO will not disclose fully if one or more directors do not possess integrity or the CEO does not. A CEO needs to trust a board that directors will react to candid thoughts and pre-plans in a mature, measured and confidential way. A CEO’s integrity is equally important. If a CEO is defensive, holding cards close to the vest, and selectively disclosing, a board will know this and get frustrated. Crucially, if a CEO ever holds back key information, or misleads the board, there is only one chance. The Board-CEO relationship will be permanently impaired.

I remember one meeting I observed when the CEO sat with arms folded, with a laptop (a barrier as no other directors had a laptop), and was interrupting directors, in an almost antagonistic way. My debrief with the board chair was that there was agreement among directors that they are left with a sense they are not being told everything. I developed a coaching program with the CEO based on improved board-CEO relations, proper disclosure and information flow, and improved body language and technique for board meetings. I also recommended adjusting the CEO's compensation to include, among other factors, improved board-CEO relations. This worked in the short term, but the CEO still was not trusted by the board and was replaced.

(ii)      CEO-C-Suite trust

Second, trust is important between the CEO and C-Suite. If the CEO is not trusted by the troops, they cannot lead. The board should know what the views are of the CEO by direct reports. In a board review I undertook recently, I canvassed the views of all direct reports to the CEO, otherwise known as a “360 review.” I recommended to the independent Chair that all directors see these views. The C-Suite also had opportunity to express views on the directors and where they could improve, which was very helpful (and eye-opening) to directors. The directors had opportunity to express views on the CEO. What ultimately occurred was dissatisfaction by the C-Suite in the CEO and specifically a lack of trust. The CEO was replaced by the board soon after.

(iii)     Director-Director trust

Third, trust is also important between and among directors. Directors need to trust each other that each director will support board decisions once they occur, will respect confidentiality, will be consistent and honest in what they say and do, and will act only in the best interests of the company. If a director or chair acts out of self-interest, directors will not work as a coherent team. Issues will be avoided because of undue influence, entrenchment and self-gain.

I conducted a peer review recently (directors assessing each other) and it was apparent that one director had integrity concerns by many others. I convened a meeting with the board chair and governance committee chair. Without breaching confidence, I advised of this gap and ultimately the director who had the low integrity rankings was asked to resign.

So building an effective board takes a key step: “Integrity” is an important attribute in directors and officers and contributes to trustworthiness and “doing the right thing” in the interests of the company.

Integrity is so important that it should be recruited for, developed, and assessed. Don’t avoid assessing and having internal controls over integrity. It can be done. And if a director or manager doesn’t possess integrity, they need to go. In the words of Warren Buffet:

In looking for someone to hire, you look for three qualities: integrity, intelligence, and energy. But the most important is integrity, because if they don’t have that, the other two qualities, intelligence and energy, are going to kill you.

Recruit directors and officers with the utmost integrity and replace those who do not have it. Your board will be better for it.

Updated on October 28th, 2012.