8 Tips for CFOs to Create Ethical Guardrails

Finance chiefs of small and mid-sized businesses need the confidence and courage to be their organization’s beacon of ethics.
Steve McNallyOctober 19, 2022
8 Tips for CFOs to Create Ethical Guardrails
Photo: Getty Images

The ninth annual Global Ethics Day is celebrated today, October 19, with the theme “Ethics Empowered.” After 20+ years at a Fortune 500 consumer goods company, I’m now CFO for a smaller, private company. In the spirit of Global Ethics Day, I’m going to explore how ethical decision-making plays out differently at small- to medium-sized entities (SMEs) and identify practical ways CFOs can create ethical guardrails for such organizations.

It’s Harder to “Just Say No”

U.S. public companies, of course, are subject to SEC reporting requirements, record-keeping requirements, and the Sarbanes Oxley Act of 2002. They must implement internal accounting controls and test the effectiveness of these controls. They must engage independent auditors and their CEOs and CFOs must make related certifications, facing significant penalties if they certify the books are accurate when they are not. As a result, U.S. public companies have mandated guardrails that encourage ethical business practices and help identify “bad actors.”

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  Steve McNally

When CFOs transition from a public company to a private SME, however, they are likely to find many expected guardrails missing. Whether due to the lack of a regulatory mandate, limited people and resources, or other perceived priorities, many smaller companies have a rudimentary internal control environment at best. As CFO, you may find yourself playing the roles of SOX lead, auditor, or even the voice of the independent member of the board. Because the rules are more ambiguous, private company CFOs may find it easier to blur business code of conduct boundaries and harder to “just say no” to ethical dilemmas, relative to public company peers. 

What it Takes

Like CFOs at large, public companies, successful CFOs of smaller, private companies tend to have a business partner mentality, strategic agility, technical and analytical skills, curiosity, and leadership ability, along with being results-oriented and known for their integrity and trust. Likewise, they need strong communication, influencing, and negotiation skills, even more so than public company peers who benefit from mandated ethical guardrails. Smaller business CFOs need the confidence and courage to be their organization’s beacon of ethics. They must shine the light on potential ethical blind spots, promoting accountability throughout the organization, up to and including cross-functional partners, the CEO, and the board of directors. As the finance chief, you are the arbiter of ethical business practices. 

Tips to Create Ethical Guardrails

1. Tone at the top. During my career at the Fortune 500 consumer goods company, we were instructed in the company’s leadership model beginning from day one and we were held accountable to living those core values accordingly. To the extent you haven’t already done so, define your organization’s values, operating philosophy, and standards of conduct, expressing these expectations in value statements, ethical codes, company policies, and communications. Then you, your CEO, and other leaders must “walk the walk,” ensuring your actions reflect the expectations and behaviors expected of the broader organization.    

2. Company code of conduct. To significantly increase ethical awareness, formally document your organization’s business code of conduct, train employees on how it applies in real-life situations, and require them to acknowledge they understand and follow it (potentially including annual certifications). 

3. Conflict of interest policy. In conjunction with your overall company code of conduct, you should specifically clarify your policy regarding conflicts of interest (i.e., situations where an employee’s personal interests and professional responsibilities may be in conflict). Such a policy should provide examples of potential conflicts, outline the steps to be taken if an actual or perceived conflict arises, and define the potential consequences of being out of compliance (up to and including termination).   

4. Delegation of authority. Based on my experience, many private SMEs are loose in terms of delegation of authority, whether related to routine purchases, one-time expenditures, and/or capital investments. By formalizing who has what authority, you can empower your team, build their trust and personal accountability, increase operational efficiency, reduce your personal workload, and generally enhance control. 

5. Segregation of duties. Ensuring effective segregation of duties in a smaller business can be challenging due to limited personnel. Even so, you should analyze roles and responsibilities and then address the highest risk areas. You should ensure roles and responsibilities are clearly defined, train the team on their responsibilities, and hold them accountable. And you should consider cross-training. For example, cross-train a backup for your payroll associate and require the backup to run payroll at least quarterly.   

6. Complete and timely reporting. As CFO for an SME, juggling multiple priorities with limited resources and lacking the incentive of external reporting requirements, becoming lax is a legitimate risk, especially if your cross-functional partners aren’t pressing for these reports. Does it really matter if we skip accruals this month? Does anyone care if the monthly financial reports aren’t issued until Day 10, Day 25, or Day 90? It is a slippery slope. But without complete, accurate, and timely reporting, the leadership team’s ability to make good decisions is impaired.    

7. Cross-functional accountability. Cross-functional business partners are also juggling multiple priorities with limited resources. They can easily go about their daily routines without considering the financial impact or ethical implications of their decisions. To ensure cross-functional accountability, jointly develop budgets, align on risk tolerance, provide analysis to support key decisions, and engage your partners in monthly business reviews.     

8. Personal awareness and support. Although professional ethics is in our DNA, small business CFOs will surely face unique ethical challenges and pressures. By participating in ongoing ethics training, creating a sounding board of CFO peers, or even reaching out to the IMA Ethics Helpline if needed, you will ensure your team is making ethically sound decisions along the way.   

Call to Action

Being a small business CFO may be one of the greatest jobs in the world, including the opportunity to create new guardrails that encourage ethical business practices. The best defense, though, is to surround yourself with an ethical team and partners who do the right thing regardless of the guardrails you’ve established. 

Steve McNally, CMA, CPA, is CFO of The PTI (Plastic Technologies Inc.) Group of companies and Chair Emeritus of IMA (Institute of Management Accountants).