Ethics in Businessby Simon Webley
Pressures to be ethical
A business case can be made on the basis of financial benefit to the company. But there has also been a marked increase in pressures on boards to address issues concerning the means by which they conduct their business. These pressures are shown in the diagram and described below.
Conspicuous corporate misbehaviour
Nearly all men can stand adversity. But if you want to test a man’s character, give him power.
The frequency of well-publicised and conspicuous examples of corporate misbehaviour in the western world has produced a sense of apprehension in boardrooms. Boards are concerned that their companies could become unwittingly involved in a scandal that might harm the company’s reputation and have serious financial implications for the business. This has led to some boards taking steps to introduce policies and programmes to prevent unethical, as well as illegal, activity from taking place within their organisations.
In the early 1990s, the main UK private sector business institutions – such as the Confederation of British Industry, the London Stock Exchange and the Institute of Chartered Accountants in England and Wales – sponsored a series of corporate governance reviews to assess the situation and recommend changes in corporate practice. The recommendations of, and response to, four main reports have led to the development of a largely-agreed framework for good corporate governance practice in the UK. If a company fails to implement ‘The Combined Code on Corporate Governance’, administered by The Financial Reporting Council, it has to explain its nonconformity in its Annual Report in order to retain its listing on the London Stock Exchange.
The first of the reports mentioned above – the Cadbury Report on Financial Aspects of Corporate Governance, published in 1992 – specifically advised companies to provide a code of business ethics to ensure consistent standards of conduct.
It is important that employees should know what standards of conduct are expected of them. We regard it as good practice for boards of directors to draw up codes of ethics or statements of business practice and to publish them both internally and externally.
These developments have encouraged companies to take a more committed approach to corporate responsibility.
Socially responsible investment
The growth of socially responsible investment (SRI) provides an additional incentive for companies to address ethics. The rapid growth of this market has encouraged business leaders to demonstrate that they have policies and practices to address the social, environmental and ethical issues relating to their business.
Furthermore, a regulation under the Pensions Act of 1995, introduced in July 2000, requires trustees of pension funds to say in their statement of Investment Principles ‘the extent social, environmental or ethical concerns are taken into account in the selection, retention and realisation of investments’. The Association of British Insurers (ABI) has issued Guidelines for Companies as to what this means in practice. The advent of stock indexes, such as FTSE4Good, also provides a reminder to boards that companies should be, and should be seen to be, good corporate citizens.
In addition to the Pensions Act Regulation, other legislation has contributed to the pressure on boards to consider values and ethics. Among the most relevant are
- Employment Act, 2002
- The Anti-Terrorism, Crime & Security Act, 2001 (Corruption and Facilitation Payments)
- Public Interest Disclosure Act, 1999 (known as the ‘whistleblower’ protection law)
- Competition Act, 1998
- Data Protection Act, 1998
- Working Time Regulations, 1998
- Occupational Health & Safety Act and Regulations, 1990
- Companies Act 2006.
Other developments have added to the pressure on companies to tackle ethical issues. These include directives from the European Commission and the International Labour Organisation, the Sarbanes-Oxley Act of 2002 in the US and the Guidelines for Multinational Enterprises produced by the Organisation for Economic Co-operation and Development in 1997. The adoption of the UN Convention against Bribery and Corruption, the advent of the UN Global Compact and the Global Reporting Initiative (GRI) standard are also important recent developments.
Media and NGOs
The activities of pressure or advocacy groups, known collectively as Non-Governmental Organisations (NGOs), together with the media, are a further source of encouragement for boards to act. NGOs often have clear objectives and use the media effectively to make their case. Some resort to direct action, ranging from peaceful demonstrations or disruption of annual general meetings to acts of violence towards company staff or executives. NGOs are concerned with an extremely wide range of issues. A positive company reaction is to ‘engage’ in discussion where possible. This helps first to explain the corporate position and second to learn from those who are prepared to discuss their cause. Listening to NGO perspectives can help companies re-evaluate corporate policy, but in reality comparatively few are willing to exchange views.
Public perception of the trustworthiness of corporate leaders remains persistently low. For example, a MORI poll shows that only 30 per cent of the UK general public thinks that business leaders can be trusted to tell the truth. As a result, there is continued pressure for boards to monitor the way they and their business partners ‘do business’.
Boards of directors can also come under pressure from their employees. Traditionally, this pressure has taken the form of claims for higher pay and better working conditions, often led by trade unions or staff associations. Today, employees are also expecting their managers to provide guidance on ethical behaviour. They expect boards to acknowledge an obligation to provide employees with clear policies and specific guidelines on the resolution of ethical dilemmas and also to back them when they follow the policy, even when that means loss of business.