Board‐level ethics committees in large European firms

• Published date: 01 October 2020
• Date: 01 October 2020
• Author: Josep Maria Argilés‐Bosch,Diego Ravenda,David Castillo‐Merino,Josep Garcia‐Blandon
• DOI: http://doi.org/10.1111/beer.12305

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  wileyonlinelibrary.com/journal/beer Business Ethics: A Eur Rev. 2020;29:824–841.© 2020 John Wiley & Sons Ltd

1 | INTRODUCTION

Almost 30 year s ago, Sims (1991, p. 493) wrote: “Ethics i n organi-

zations is one of tod ay’s hottest topic s as evidenced by th e pleth-

ora of article s in the literatur e.” Interestingly, this st atement was

made before the En ron, WorldCom, an d other corporat e scandals

at the beginning of t he century, which le d to the enactmen t of

the Sarbanes- Oxley Act (here inafter, the SOX Act) in t he United

States. The SOX Ac t legislates ethic al behavior for fi rms and their

auditors, req uiring the develo pment of codes of ethi cs for employ-

ees accompanie d by evidence of train ing in those codes (C anary &

Jennings, 20 08; Rockness & Ro ckness, 200 5). Whereas the ac tual

impact of the SOX Ac t on the ethical beh avior of business execut ives

remains an open qu estion (Stevens, 2 004), there ca n be no doubt

that it has encour aged both researc hers and prac titioners to foc us

their attention on business ethics. Therefore, Sims’ (1991) statement

seems even more re levant today than it was in the ea rly 1990s.

Sims (1991, p. 493) defines the ins titutionaliz ation of ethics as

“(…) getting ethic s formally and expli citly into daily busine ss life. That

means getting e thics into company pol icy formation at the b oard and

top management lev els and through a for mal code, getti ng ethics

into all daily decis ion making.” The auth or distinguishe s three main

instruments for the institutionalization of business ethics: the cre-

ation of specifi c committees on t he boards of direc tors (BoD), the

approval of codes of e thics, and the implement ation of ethics train-

ing programs. S cholars have devoted a great dea l of attention to the

creation by corpo rations of codes of ethics (Schw artz, 2004), which

are considered a ne cessary but not suffici ent condition for guaran-

teeing ethica l behavior (Webley & Wer ner, 2008) and, to a les ser

extent, to the i mplementation of ethics tra ining programs (Warren,

Gaspar, & Laufer, 2014). However, even thoug h the principal instru-

ment for the inst itutionalization of bu siness ethics shoul d be the for-

mation of perman ent board-level comm ittees, this to pic has been

much less invest igated.

This study exa mines the determinants of th e creation of ad hoc

ethics-related c ommittees (ERCs) in B oDs. The main objective is to

assess the impa ct of BoD struc ture and demographics, fi rst on the

decision to form a com mittee, and se cond on the type of s pecific

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DOI: 10 .1111/bee r.12305

ORIGINAL ARTICLE

Board-level ethics committees in large European firms

Josep Garcia-Blandon1 | David Castillo-Merino1 |

Josep Maria Argilés-Bosch2 | Diego Ravenda3

1  

Ramon Llull, Barcelona, Spain

2Business Department, Universitat de

Barcelona, Barcelona, Spain

3  

Auditing Department, TBS Business School,

Barcelona, Spain

Correspondence

Josep Garcia -Blandon, IQS Sch ool of

   

Augusta, 39 0, 08017, Barcelona, Spai n.

Email: josep.garcia@iqs.edu

Abstract

After the approval of a co de of ethics, the creat ion of a permanent board-l evel eth-

ics committee is th e next step in the ins titutionalization of bu siness ethics. This

study explores h ow the board's struc ture and demograp hic characteris tics explain

the decision to form an et hics committee. Th e analysis is based on the co nstituents

of the Standard and Poo r's Europe 350 index. Cons istent with our hypothes es, we

find that ethics co mmittees are more likel y to be found in firms with a l ower pres-

  

observe that boa rds chaired by executive dire ctors seem to favor the c reation of an

ethics committe e. Additionally, as we had anticipat ed, firms with stro nger agency

conflicts seem to b e more willing to create committees. Th e analysis conducted with

segmented sample s reveals that the model has greater explanato ry power when ap-

plied to firms from com mon-law and French civil-law countries than whe n applied to

firms from the Ge rman–Scandinavian civil-law area. Finall y, our results indicate that a

firm's country of orig in is a more influential factor in exp laining the decision to create

an ethics commit tee than the industry to which it bel ongs or even the magnitude of

its agency conflic ts.

    

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GARCIA-BL ANDON et AL.

committee created. Regarding the latter point, companies use dif-

ferent names for ERC s (mainly “ethics com mittee”; “corporate gov-

ernance commit tee” and “social responsib ility committee”). We bas e

the empirica l analysis on the consti tuents of the Standa rd and Poor's

Europe 350 stock ma rket index (herein after S&P350) at t he end of

2018, in order to obt ain a homogeneous s ample composed b y the

largest European corporations.

The motivation f or this study come s first from th e growing im-

portance of t he institution alization of busine ss ethics for ac adem-

ics and prac titioners alike. The “pleth ora of articles in the liter ature”

noted by Sims (1991), which has since gr own even larger, provide a

clear reflec tion of the interest of this topic i n academia. With regar d

to the real-world re levance of the issue, Sim s and Felton (2006) arg ue

that the attent ion of the media to corpor ate scandals has led to an i n-

creased interest in business ethics courses and classes. Other exam-

ples of the prac tical relevance of the insti tutionalization of busines s

ethics are the proliferation of codes of ethics and ethics training pro-

grams, or the Au gust 2019 declaratio n of the Business Roun dtable

association, fo rmed by the chief exe cutive officer s (CEOs) of the

largest Amer ican firms, which red efined the purpose of the c orpora-

tion in the followi ng terms: “to promote ‘an economy that s erves all

Americans’ ” (Business Roundt able, 2019). Despite the se effort s, as

noted by Jamali, El Di rani, and Harwood (2015 , p. 125): “Formulating

and translati ng corporate soci al responsibilit y (CSR) str ategy into

actual manage rial practice s and outcome valu es remain ongoing



     

for a higher engage ment of firms regarding the ach ievement of sus-

tainable devel opment goals. Second, de spite the strong interes t that

scholars have sho wn in the institut ionalization of bu siness ethics,

to the best of our kn owledge no study to date has investig ated the

drivers of the for mation of ERCs. The ai m of the present pap er is

to fill this gap in th e literature. Th is research topic is re levant not

only because t hese committe es constitute th e natural next s tep in

the institut ionalization of busine ss ethics after the a pproval of a code

of ethics, but al so more importantly, bec ause they confer legitimacy

on the firm's ethi cal agenda and the signaling ef fect to the different

stakeholde rs of its commitment to ethica l principles (Sims, 1991). In

this vein, Stöber, Kotzia n, and Weißenberger (2 019) argue that once a

firm has a code of eth ics, the commitment of t he top management to

the code is critical for influencing the firm's ethical culture.

By addressing this gap in the research, we intend to make three

main contributions to the literature. First and foremost, we extend a

long-standing line of research in business ethics that assesses the role

of BoD structure and demographics as the drivers of the decision to

approve a code of ethics. This paper goes one step further by inves-

tigating how these same determinants may influence the decision to

     

nature of our sample of firms allows us to examine the influence of

country and industry-specific issues as moderating factors of the de-

cision to create these committees. In this regard, prior related studies

(Diaz-Carrion, López-Fernández, & Romero-Fernandez, 2019; Frias-

Aceituno, Rodriguez-Ariza, & Garcia-Sanchez, 2013; García-Sánchez,

Rodríguez-Domínguez, & Frías-Aceituno, 2015; Rodriguez-Dominguez,

Gallego-Alvarez, & Garcia-Sanchez, 2009) have stressed the impor-

tance of country-specific characteristics for the institutionalization of

business ethics. Second, we expect to contribute to the related corpo-

rate governance and social responsibility literature by also examining

the decision to create specific corporate governance and social respon-

sibility committees. Given that business ethics, corporate governance

and social responsibility are not identical concepts (Fischer, 2004), ex-

ploring the drivers of the creation of each specific committee is also a

challenging issue that is worth addressing here. Finally, we aim to con-

tribute to the management literature by broadening the understand-

ing of the internal organization of the BoD. Specifically, Chen and Wu

(2016) have stressed the lack of knowledge about the internal organi-

zation of boards through board committees. With these objectives in

mind, this study aims to provide an accurate representation of which

types of company have decided to form ERCs and, when this has been

the case, what kinds of specific committee they have created.

Our results su ggest that countr y-specific issues see m to be more

important d eterminants of the dec ision to create an ERC than indus-

try-related is sues. As regard s the relevance of Bo D characteris tics,

even though the re sults do not suggest strong ef fects, we observe

some interesting significant relationships that are consistent with

our expect ations, such as the p resence of female di rectors in the

           

suggesting t hat ERCs are more likely to be create d in companies ex-

periencing stronger agency conflicts are particularly robust.

The paper conti nues as follows. Th e next sectio n explores the

relationship between the related concepts of business ethics, corpo-

rate governance, an d social responsi bility. Then, Sec tion 3 reviews

the previous literature and develops the hypotheses of the study.

Section 4 out lines the design of the rese arch and describes the da ta

set, and result s are presented and discu ssed in Sections 5–7. Finally,

the last sect ion summarizes the main conclusi ons, implications, and

limitations of th e study.

2 | BUSINESS ETHICS, SOCIA L

RESPONSIBILIT Y, AND CORPORATE

GOVERNANCE

The triangle formed by business ethics, social responsibility, and

corporate governance can be examined from multiple perspectives.

Evidently, the nature of the relationships between the three concepts

is conditioned by t he specific def initions of each one . According to

Carroll's pyr amid (Carroll, 1991), busi ness ethics is inc luded in the

firm's social responsibility, as the third dimension of responsibility.

Fischer (200 4) argues that this view is consiste nt with the approach

adopted by many busi ness ethics texts base d on the relationship be-

tween firms a nd their stakeholders ( both within the organiza tion and

outside it, in cluding the natu ral environment a nd society), and al so

with the view of som e management texts. For exam ple, Samson and

Daft (2003 , p. 147) note that ethics “deals wi th internal value s that

are a part of corp orate culture and shape s decisions concerning s ocial