Risk culture: Who’s watching the board?

ACCA, the world's most forward-thinking professional accountancy body. With the rapid behaviour-changing disruption of recent years and the ongoing stream of corporate governance failures, ACCA has been digging deep into how interconnected risks such as climate change and geopolitical issues are influencing the way we approach risk management. This podcast series will look at what risk culture means and to what extent risk and accountancy professionals understand its impact on performance. Today we are delighted to be speaking with Vera Sherra Panova, a fellow ACCA member who has a wealth of experience in ethics, risk and compliance and is an executive director of Boards of the Future. She is a member of our Global Forum for Governance Risk and Performance and has been a key contributor to our risk culture series. From her input on confirmation bias and ethical leadership for the banking report last year, in 2024, to her presentation for our CROs and heads of risk community on the evolving role of modern day risk and ethics and the pull between the two and then indeed where compliance crucially intersects. In a nutshell, today we will be discussing how to foster cultures that get people to do the right thing, not because they have to, but because they want to and because leaders make sure doing the right thing is the easy thing to do. So Vera, let's start with what ethical leadership means in practice and how you think Boards can move beyond surface level commitments today. So for example, as you've talked about before, including earlier this year at the AC, a fee conference here in London about ESG policy changes. Thank you Rachel. Thank you so much for having me today. I'm delighted to be with the audience and talk about the topics that are very close to my heart. You didn't start with an easy one, I gotta say. You started with the most difficult question and I think I will do the best that I can, but you know, I'm many academics and practitioners try to answer that question. What is ethical leadership at the heart, right? So ethical leadership, if you ask me, it's not just about compliance and following the rules, although that part is very important to you. It's about responding to the very fundamental question of moral philosophy. What ought one do? And this question applies to both individuals in organizations alike. Ethical leadership is something which is not only about legal defensibility or reputational management, it requires reflection, it requires action and judgment informed by moral reasoning. If we continue on the thread of law and ethics, ethics both informs the law and goes beyond its limits. And for the most part, it says the boundaries. Ethics concerns what should be done, even if it's not required, a prohibited by law, and that leads us to the very obvious conclusion that the fact that something can be done does not mean that it should be done, right? All of that said, we of course cannot expect ethical perfection from any person, both member, C-suite leader or just like a random person, right? The most we can ask is a try, is sincerity in that try, and a skill in decision making. And this is what we exactly expect from the board members and executive leaders. Boards of the future that you mentioned, I'm the executive director of that nonprofit. We support this wholeheartedly by encouraging boards to develop habits of ethical reflection. And we offer some tools to help directors on that way, to help directors embed values into the strategy and not just the surface level commitments, as we have seen in the ESG space. Now, thank you Rachel for putting out and referencing to the my talk at the ACF conference, because while we're facing now a very interesting moment around the whole ESG movement, I think ESG can be viewed as an ethical orientation of a company at the organizational level to the certain extent. So I think all of that is being put to a very serious test under the U.S. administration, and I'm sure the listeners are very much aware of what's going on and all the executive orders in the backlash. So it's a litmus test and company's reactions will actually reveal the depths of their convictions. And broadly speaking, I'm seeing at these three types of responses, the first type would be withdrawal, a rollback. Some companies are reversing ESG initiatives entirely altogether, which may suggest, at least to me, that their commitments were performative from the start, or maybe they're too out of touch, too out of reach, that they're really happy with the opportunity to roll them back. Secondly, many companies reframe and do the green hashing. Green hashing is an interesting thing. It's a term that describes exactly the opposite of green washing, right? So previously companies used to proudly publicize all kinds of and sorts of commitments and pledges. Right now with the green hashing, it's right the opposite. So they quietly continue their work without any publicity so that nobody notices. There are certain legal risks attached to that practice, of course, but I know, absolutely, I know from private conversations that many companies do that. And also the third bucket of the companies who are resisting in public, in the public eye, and I think Costco will come to mind here. But not only Costco, by the way, I was reading an article, unfortunately, very recently about the proxies and so far, and they were looking at the anti-DI proposals and how these are going with shareholders and basically, they're not going well. So there have been a number of anti-DI proposals from politically motivated activists and companies like Coca-Cola, Apple, Berkshire, Hathaway, Costco rejected them entirely. The support for those anti-DI proposals actually ranged between one and two percent. So 98, 99 percent were just okay with DEI, even given their whole situation in the country. So that gives us hope, I guess. Yeah, I mean, we see throughout this risk culture series that, you know, as you know, being on the forum and everything, that ethical leadership and compliance really often are treated as a tick the buck exercise and not embedded into strategy or the board fails to understand the principles of the different reporting requirements and what they engender. So this is, again, just a segue into the next question about boards being truly equipped and motivated to lead with ethics at the center and especially given the speed of change and transformational challenges with digitalization and AI adoption and that goes for third party exposure and the consequences of, you know, doing property diligence on that. So I get that it's really overwhelming today, but why do you think it's so difficult for long-term thinking to gain traction in the boardrooms? So that's another great question. To answer precisely where the boards are equipped and motivated, this would be a yes and no. And let me explain, one of the most important parts of moral philosophy is basically just being able to formulate great questions in the right ways because when you formulate good questions in right ways, this is the pathway to unlock the answers that you're looking for, right? And this skill is basically very underappreciated, but we know that this skill is very much central to the board director role. Indeed, it comes down for directors and for an effective oversight, it comes down to asking good questions in the right ways. Think about it as chat GPT, okay? When you work with chat GPT, the key skill that you need to have is basically asking the good questions, right? And the quality of the answer actually depends on that. They call it prompts. They don't call it questions in that area. Everything depends on the prompt. Sometimes if the prompt is unskillful, bad, not informed, not formulated in a good way, you're going to think like, oh, maybe I was better off without that answer. So yeah, so boards do ask questions. They know that it's important to ask questions, but the thing that they don't know is that it is the basis and the fundamental of moral philosophy and philosophical reasoning, right? So this is the part that goes into my yes, okay? So they do it. They just don't know that there is a link to moral philosophy, ethics and ethical orientation and whatsoever. Now, why did I say yes and no? So where is the no part? Company directors are legally bound to acting the best interest of a company, but there is a very diverse range of real people whose interests are very intimately linked to and affected by that company, right? And the truth is that directors are frequently required to make decisions that will annoy one group or another and we're stepping into the territory of stakeholder capitalism. On one basis, our director is to exercise their discretion and are they to draw on a personal set of values and principles? Are they to attend to the standards of communities? Is there any kind of framework of absolutes that is above all other considerations? So it's not really easy to answer all of that and part of the answer is the directors are bound to apply the values and principles of the company, what the company stands for, right? Interesting part here is basically that directors are in a very good position to frame that. What are the values and principles of the company? And they have the capacity to define and amend the ethical framework. Indeed, what the board of a corporation is is it's mind and conscious. Do directors actually recognize that they have that leverage and they have that power? I'm not sure. So following from that, we have that very heavy ethical burden carried by directors and also a lot of leverage and also a very little self-awareness on that regard, right? And all of that combined gives us a yes and no a very mixed answer. And to help with all of that, we developed the board ethics and compliance assessment tool, which launched it just a week ago. This tool is intended to help figure out all of those things, just to give it some kind of a structured framework to start that conversation. And maybe when you start that exercise, when you start that conversation, you come to a conclusion, oh, we're already doing something of that, right? And you come to a conclusion, oh, there's a blind spot, this we're not doing and we haven't thought about that, right? So this is not like an assessment or grading, like at school, right? And we're not putting marks here. This is an exercise to channel the thought of board members, channel their attention in the right direction. If we spend one minute, one minute on AI, and I know that today every podcast, every speech, every talk should have something on AI, otherwise it's not good. So just a second on AI, all of that ties really closely. What I'm seeing right now, and I leave not really far from the Bay Area, I'm there every one or two months. So I kind of have an idea of what's going on there. So most of the boards across the globe are still tackling ethics of AI and all of that on the level of like, are we going to allow our employees to use chat, but you are not. But this is so less century, guys. How about an AI-generated advisor sitting on a board? How about digital resurrection of a deceased founder? And I'm not joking. How about the relink and the evolution of humanity by design? How about all that? And my thinking is that there is nothing better than the ancient wisdom and philosophical thinking to grapple with all of these seemingly photoreistic questions that are going to arrive in the board from very soon. Yes, I know we could talk all day about that as well, and I have had lots of really insightful discussions with you and the forum on this, but I know you have talked a lot before Vera just about the extent to which boards prioritize with all the different things that they're dealing with, prioritize proactive ethics or over reactive compliance, which you have said before, and also where accountability lies. So I wonder what role does the chair or the culture of the board play and whether ethics is taken seriously on these things? Again, we can spend a lot of time on this, but the role of the board chair is absolutely fundamental. And the same as the organization, whether we are studying the culture or managing the culture or not, or which is like letting it flow, as it flows, there is a culture, right? So the same goes for the board and the board members as a group working together, they have some kind of culture. Even if they're not working intentionally with that culture, even they're not looking intentionally into that, there is a culture. And the culture and the character of the board affects everything, how they work, the issues that they raised, how they discussed those issues, how they resolved those issues, everything. And it's not just a backdrop, it really shapes who speaks up, is it okay to raise your hand and you know stick your head out and say like no, I'm not on board with that, so to have some descent in the room. And the chair is an orchestrator of all of that. That person is the best protection against conditioned blindness and groupthink, which is a very big problem on board, as we know. Now, when it comes to ethics, very often directors would say now we don't need any kind of formalized framework because we have gut feeling, right? We all have like some personal morals. That's why we can't tell right from wrong, let's let's go with the gut feeling. But it's actually tricky because intuition and the gut feeling can often mislead. Think of it over skid, for example, when you're getting a skid in your car, your intuition is telling you to push on the brakes as hard as you can, which is actually the wrong way to handle it, right? We all know that to exit the skid, you actually need to do the opposite, right? So this is just to illustrate and this is why ethics requires intentional practice and training. The practice of ethics can confront the director with the uncomfortable fact that personal organizational values and sometimes are not aligned and resolving such tensions requires a very involved chair. Again, we're talking about the chair person being an orchestrator, a person being able to challenge and be challenged on the validity and applicability of personal VS organizational values and principles. And all of that can be strengthened by greater reflection on how power is exercised, both within the boardroom and in the wider director community. We all know that there are unwritten protocols, hierarchies, and the instinct of self-preservation in the boardroom, which can actually distort the judgment. For example, think of a less senior director, first time director, who just enters the boardroom. And of course, that person can feel a lot of self-preservation instinct and a pressure to conform with the more experienced peers. So it's the chair who needs to take a look there and make sure that pressure to conform does not block valuable insights, which might be coming from that person and maybe it's a descent or something like that. A strong board chair can make a very big difference to close it and to summarize it by fostering psychological safety, by fostering ethical reflection, open inquiry, all of that. Yes, and you did talk quite a lot about that. There were a few quotes from you in the baking report about what everyone brings to the table and that cognitive diversity and quality of strong leadership as being able to be challenged, get everyone into the conversation. There's also always going to be lessons to be learned as we talked about throughout the series. And I wonder if you could also touch on any recent corporate cases or collapses that you think help us better understand the gap between compliance and culture. You could open a newspaper from today and find really good examples. I would probably do any kind of finger pointing. I would rather on a high level say that we live in the world of misaligned cultures and this is really difficult and dangerous. And what I mean by this is the discrepancy between what's written on paper, policies, code of conducts, and value statements and everything, and the lead reality of how people actually behave. And if you look at any enforcement case by the DOG or SFO or whatever other enforcement agency around the globe, the issue is really about the lack of policies. The cases are all about misaligned cultures. Ethics and compliance programs exist on paper, but they are not lived and breathed and it's all about the failure to follow what's on paper and it's all about the discrepancy. And one of the most powerful ways to uncover this misalignment is through observation or if you want to call it in a more fancy way, ethnographic study. Essentially acting as a fly on the wall, watching how employees actually go about their tasks, listening to their conversations, maybe asking them a couple of questions. What do you think about risk? What's risky? What's not? What do you think about ethics? What's ethical? What's not? And also noticing that leadership behavior, what kind of actions are rewarded, who gets promoted, who gets ignored, and how people navigate all that. And then comparing that to lived culture, that lived culture to how the organization presents itself on the paper. And once we see that gap, it's usually the aha moment. This is where the executives say, oh wow, okay aha, now we see it, now we get it. And this is the right moment for both to step in and bring ethics out of the abstract and clearly see the discrepancy. Yeah, definitely. And we've talked about the debilitating misalignment that we found throughout the risk culture series as well through our surveys and what the role of our profession and observing going around taking the notes and telling the story. But just quickly before we do move on on our last one about the role of our profession, it would be great to see what you think it's time to rethink how boards measure success. I know you have talked before about how investors can be better allies and embedding ethics into corporate strategy. So could you share your thoughts on this with our listeners briefly before we get into the role of accountancy in all of this? Gladly, that's a great one. And this is something I've been looking at very recently. So the value of a strong ethical framework is that it provides a board with the basis for defining the organization's place in the world, as a matter of choice rather than in conformance with the wishes of investors, shareholders, and everybody else. Yeah, this is exactly the basis, the fundamental that can allow boards to go beyond the question what will maximize returns next, and rephrase it and reframe it to what are we building in a longer term and for whom? When it comes to investors, this is a really interesting story. The breakthrough interpreters in the early 20th century, and we can talk about Henry Ford or Thomas Edison, they had to rely on their personal networks of wealthy individuals to secure finance, and because at that point of time there were no PE funds, no VCs, no access to capital. There were big banks like GP Morgan and others, but they were not interested in investing in strange ideas. So with venture capital and private equity and the rise of democratized investing and easy access to capital, the expectation was that brilliant people with brilliant ideas now would be able to scale their ventures and make the world a better place. But something really strange happened instead of making everything better, it made almost everything with rare exceptions worse. The investment industry became committed to an approach that demands startups and material companies alike, pursue maximalist growth at breakneck speed, and move fast and break things, the infamous mantra, has led to irresponsible decisions and we bear the cost as a society, social cost and economic cost. So the model did not work as expected, it did not deliver on the expectations and even more troubling, this approach overcrowded everything else, right? Any alternatives, interpreters who have strong values and refuse to compromise for returns and put everything on altars of quick profits, they're just forced out or they need to morph, and this is basically love it to leave it dilemma. So what needs to change here, I think founders and companies, first of all, must understand that securing any kind of capital is not a success because right now for a startup or in the Silicon Valley, securing any kind of capital is a great success, it's a measure of success. But this is wrong because success should be aligned with finding an investor who is on board with your vision, who is on board through incentive structures, matching the founders values and mission. People who provide money for the funds, wealthy individuals, families, institutions like development banks, they also have ethical aspirations, they are also people and they also want to make world a better place, but what happens is they are not involved in the conversation and they remain passive, they delegate responsibility to fund managers of all kinds and sorts of flavors, and the incentives of those funds are very much in favor of quick profits. So this is where the old chain gets really broken. The more we bring the shareholders back into the conversation and the more we leverage their own personal ethical aspirations, I think the better it's going to get. Yes, I mean the important role of investors and also your assessment tool would be a good thing for them to be using on this as a guide in terms of how ethics can guide their investment decisions. We could talk all day via a bit. On the last note, I'd really like to get you to give us some idea about what the signals, accountancy and risk professionals should be looking for when ethical leadership is failing and how they can ensure ethics is part of core decision making and not just policy documents like you said before. Yeah, that's a great one. A board is only good as the information it interrogates. All right, and that basically means that accountants and risk professionals and everybody else needs to put a really good effort into the information that the board sees and interrogates. Quite quality information, really key things and we have seen from there were some analysis carried out saying that the average board pack can be like 200 pages. I don't believe that 200 pages are all high quality information for the board's eyes. Right, so there is also some broken link here. Also, you know, the distinction between financial and non-financial risk. I think it collapses. I think there are a lot more groups and players actually understanding that this distinction was always quite illusional because non-financial behaviors and non-financial things, they come into the picture. They are also manifested in financial statements whether we want it or we don't. To give you an example really quickly, look at the FCP enforcement for example. FCPA has two parts. One part is about how unethical and how bad it is to give a bribe and the second part is the accounting provisions of the FCPA. Because when you need to do a bribe, you need to get those money from somewhere. You need to hide them in the financial statements whether it's going to be some slush fund or you're going to put it as a consulting fees or something like that. It's going to appear on your financial statements and if you look at the enforcement actions and actual cases, they were all channeled through the accounting provisions. So the connection is there in accounting professionals are very well positioned to see all of those red flags. So I'm not taking any pressure of you guys, sorry. I think all of your points asking the right question, prioritizing, informing the board better, being proactive and looking for all the different scenarios, how to facilitate the good ones, what are the bad ones? They're all great words of wisdom and they also can be applied. I'm glad you mentioned it for an upcoming combating fraud project and no doubt Vera will be looking forward to hearing your insights on those survey findings as well. So thank you so much for coming and enjoy the rest of your day out in California and see you at our next meeting. Thank you so much Rachel. None of this is easy. All of this is possible. 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