Business Ethics and Corporate Governance - White Paper


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Ethics and Culture in organisations: 53% of C-suite executives think their boards are out of touch in understanding the ethical issues facing their business. Its reasonable to suggest that companies aim to develop an organisational culture that is self-policing and that positively encourages concerns about ethical behaviour to be raised at all levels and in all locations.A White paper written by colleague Dr Attracta Lagan for the ICAA.

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Business Ethics and Corporate Governance - White Paper

  1. 1. Why business ethics your bottom
  2. 2. DisclaimerThis publication has been prepared for the Instituteof Chartered Accountants Australia (‘the Institute’)by Managing Values principal, Dr Attracta Lagan.While every effort has been made to ensure itreflects current legislation, neither the Institute norany representatives from Managing Values shallbe liable on any ground whatsoever to any partyin respect of decisions or actions they may take asa result of using this publication, nor in respect ofany errors in, or omissions from it. The informationcontained in this publication is general commentaryonly and should not be used, relied upon, or treatedas a substitute for specific professional advice.Institute of Chartered Accountants AustraliaThe Institute is the professional body for Chartered Accountants in Australia andmembers operating throughout the world.Representing more than 72,000 current and future professionals and businessleaders, the Institute has a pivotal role in upholding financial integrity in society.Members strive to uphold the profession’s commitment to ethics and quality ineverything they do, alongside an unwavering dedication to act in the public interest.Chartered Accountants hold diverse positions across the business community, aswell as in professional services, government, not-for-profit, education and academia.The leadership and business acumen of members underpin the Institute’s deepknowledge base in a broad range of policy areas impacting the Australian economyand domestic and international capital markets.The Institute of Chartered Accountants Australia was established by RoyalCharter in 1928 and today has more than 60,000 members and 12,000 talentedgraduates working and undertaking the Chartered Accountants Program.The Institute is a founding member of the Global Accounting Alliance (GAA),which is an international coalition of accounting bodies and an 800,000-strongnetwork of professionals and leaders person that acquires this publication from theInstitute of Chartered Accountants Australia mayreproduce or amend this document for their ownuse or use within their business. Apart from suchuse, copyright is strictly reserved and no part of thispublication may be reproduced or copied in any formor by any means without the written permission ofthe Institute of Chartered Accountants Australia.Why business ethics matter to your bottom linePublished: May 2013Published by: Institute of Chartered AccountantsAustralia, 33 Erskine Street Sydney NSW 2000ISBN: 978-1-921245-79-4ABN 50 084 642 571 The Institute of Chartered Accountants in Australia. Incorporated in Australia. Members’ liability limited. 0413-20
  3. 3. Institute of Chartered Accountants Australia    3   4 5 7Introduction The changing businessenvironmentGlobal perspectives onintegrity management8 9 10The limitations ofcomplianceThe high cost offailure to manageethics at workThe impact of ongoingchange on institutionalintegrity11 12 13The business benefitsof organisationalintegrityLeaders ininstitutionalintegrityBusiness ethics asthe basis of businessstrength14What needs to be done?ContentsStatement of purposeThis paper seeks to inform those charged withfiduciary management of enterprises why ethicscan no longer be treated as a discretionarycost to the business. Management of the ethicaldimension is instead a significant contributor tofinancial success. This is highlighted in the paperthrough the use of examples of how leadingcorporations are integrating ethical managementinto business practices, change programs, andfraud, risk and compliance systems.
  4. 4. This paper suggests that Australian business leaders andregulators need to shift their current focus on employeeethics training as the solution to unethical practices, to a neworientation that focuses on building the sort of institutionalintegrity that supports employees in making ethical choices.It argues that such a shift demands a rethink of businessleaders’ current mindset about what is appropriate, as wellas a critical review of modern day best practices in businessethics management. Effective management of businessethics requires an organisational strategy that is in tune withwider societal values and the public’s new expectationsof business.Inside the finance sectorIn 2010, John Hartman became the youngest person jailedin Australia for insider trading. The former equities dealerclaimed to have earned $350,000 in salary and bonuses in2008, when he was then only 23 years old. In sentencingHartman, NSW chief judge Peter McClellan said thefinancial services industry had ‘corrupted his values’. In adamning characterisation of the culture prevailing in theheady pre-GFC days, the judge wrote: ‘The temptations areso great, and the potential rewards so significant, that thefall into criminality of individuals is a significant risk’. Henoted that paying a recent graduate generous remunerationso out of kilter with his modest responsibilities ‘underlinesthe extent to which the values which underpin our societycan be compromised. The values of productive endeavourand integrity in dealings and business can easily be lost’.IntroductionWhy business ethics matter to your bottom lineargues that ethical conduct has moved front andcentre as corporations are increasingly exposed to theglare of public scrutiny. In particular, there has been afundamental shift over the past few years that requiresa complete rethinking of the functions of compliance,governance and social accountability, putting ethicsinto the daily vocabulary of mainstream management.It is not the strongestof the species thatsurvive, nor the mostintelligent, but theone most responsiveto change.Charles Darwin  Why Business Ethics Matter to Your Bottom Line4 
  5. 5. Institute of Chartered Accountants Australia    5   The physicist and systems theorist Fritjof Capra suggeststhat over the past few decades, a new economy hasemerged that is shaped definitively by information andcommunication technologies. These forces have delivereda business world and society that is characterised bymassively complex systems which permeate everyaspect of our lives. They have spun massive technologicaland social changes that are creating an organisationalenvironment almost unrecognisable from the perspectiveof traditional management theory and practice. The keydrivers are:Size mattersGlobalisation has made all societies interdependent andaccountable for the social, environmental and politicalchallenges that threaten to undermine our shared future.With 80,000 transnational enterprises and ten times as manysubsidiaries and countless millions of small and mediumsized businesses, business is the major institution in theworld today. Greater corporate responsibility for self-regulationis being demanded as the necessary accompaniment tothe process of globalisation. With increased power comesgreater accountability.Ethical challenges for business include international labourstandards, human rights, and climate change, as well asmarketplace integrity. Transparency International’s 2012Corruption Perceptions Index shows that corruption continuesto ravage societies around the world. Two-thirds of the176 countries ranked score below 50, on a scale from0 (perceived to be highly corrupt) to 100 (perceived to bevery clean). Pressure groups argue that it is big businessthat continues to facilitate much of this corruption.The internet as the new public squarewhere business is held to accountThere is a new global antenna tuned to the perceivednegative impacts of business on nation states. Digitalisationhas empowered consumers, employees and grassrootsactivists to take immediate direct action where they findbusiness ethical standards to be unacceptable. Qantas,for example, found itself the victim of a Twitter campaignwhen it asked its followers: ‘What is your dream luxuryinflight experience?’ The response was some 16,000 tweetsanywhere between sarcastic and critical, reflecting the PRdisaster that had followed Qantas’ earlier grounding of itsfleet, stranding tens of thousands of customers worldwide,during an acrimonious industrial dispute. Woolworths’ socialmedia platform also became the target of public angerfollowing Alan Jones’ derogatory remarks about the PrimeMinister Julia Gillard’s father ‘dying of shame’, at a YoungLiberals event attended in a private capacity by a Woolworths’corporate affairs manager employee. The executive resignedto avoid any reputational backlash against his employer.International pressure groups such as Oxfam have changedtheir traditional focus from reforming government policiesto harnessing the power of consumers to target globalcompanies; the influential NGO is demanding companiesuse their economic power to raise the ethical standards inthe countries where they operate.Nike became the poster child for exploitative sweat shoplabour in developing countries. Its initial reaction was to refuseto accept responsibility for its third-party suppliers, but it hasnow reversed this position to become a champion in settingstandards for suppliers. It is now an advocate for raising labourstandards in developing countries, and has opened its supplychain management methodologies to all competitors so they,too, can be part of the solution. An ever-increasing regimentof iconic brands have become the standard bearers for a newway for business to operate. These include Coca-Cola, Mattel,Home Depot, Marks & Spencers and Wal-Mart. Respondingto such global challenges requires more than a short-termperspective; it can mean that organisational leaders have totrade off competing priorities, such as returns to shareholders,with responsibilities to the environment or communitystakeholders.GFC legacyThe worst economic crisis since the Great Depression waslargely caused by poor business decisions made by boardsof directors and executives in both the financial and industrialsectors. Institutional compensation practices, in particular, wereseen to give rise to a new type of amoral business managementpractice that no longer curtailed the potential negative impactsof business. In the wake of what has also been seen as a crisisin ‘institutional integrity’, where both business and its regulatorsfailed to protect society, businesses are facing greater scrutinyfrom global monitoring organisations.The changing business environment
  6. 6.   Why Business Ethics Matter to Your Bottom Line6 Organisational cultural riskThe fallout from the GFC has led many boards to concentratemore on compliance than performance. This is the easy wayout; it is not making the leap in organisational culture requiredto avoid ethical risks in the first place. According to theErnst &Young (E&Y) 11th Global Fraud Survey 2010, more thanthree-quarters of board members are worried about personalliability. The UK Bribery Act, passed in 2010, created a newoffence that can be committed by commercial organisationswhich fail to prevent persons associated with them fromcommitting bribery on their behalf. It is a full defence for anorganisation to prove that despite a particular case, it hadadequate procedures in place to prevent persons associatedwith it from bribing. It follows that commercial organisationsneed to adopt a risk-based approach to managing such risks.What’s significant about the Bribery Act is that it not onlycreates an offence relating to bribery of a foreign publicofficial, it also creates a new form of corporate liability forfailing to prevent bribery on behalf of a company.The UK Serious Fraud Office, which investigates such cases,has a policy of co-operation with commercial organisationsthat self-refer incidents of bribery. The company’s willingnessto co-operate and to make a full disclosure will be taken intoaccount in any decision whether it is appropriate to commencecriminal proceedings. This, and the fact that the Bribery Actlays down a set of six principles which, if followed, will assistin creating a culture that minimises the risks of individualsbreaking the law, is a departure from the traditional ‘blackletter’ approach to ethical conduct. In light of the fact thatmany global Australian corporations are now potentially subjectto the UK Bribery Act provisions, it’s interesting to speculatewhether BHP Billiton was influenced by this new regime inits decision to inform the authorities that they may have beeninvolved in bribing foreign officials at some of its explorationsites. This followed soon after Rio Tinto executive Stern Huwas found guilty of accepting bribes in China.On a positive note, Transparency International (TI), whichpublishes a global index on corruption, ranks Australiaconsistently in the best 10 countries to do business in.However, TI warns that four countries among Australia’s toptrading partners – India, Thailand, Indonesia and Vietnam –have some of the most corrupt public sectors in the world.As Australian businesses continue to expand their operationsinto other countries with lower levels of transparency andgovernance, boards and C-suite executives will have toremain vigilant that ethical standards are maintained.Notwithstanding that boards are increasingly concerned aboutrisks associated with unethical conduct, this does not seemto be filtering down into effective risk management strategies.Business ethics surveys published by the major accountancyfirms, including E&Y’s 11th Global Fraud Survey, consistentlydemonstrate that employees in all sectors are increasinglyworking in environments conducive to misconduct, and thateffective interventions that largely revolve around strengtheningorganisational integrity systems to reduce ethics risks arenot very common. A chilling example of the impact oforganisational culture on employee behaviour was exposedin the New York Times by one of Goldman Sachs long-servingemployees. Greg Smith, the former executive director andhead of the firm’s US equity derivatives business in Europe,the Middle East and Africa, in an op-ed in the March 14, 2012edition of the newspaper, described Goldman Sachs’ cultureas ‘toxic and destructive’. Smith said his reason for resigningfrom Goldman Sachs was that the firm’s culture had changedso much over his time that it had become a place where profitstrumps all other considerations; what was good for the firmand made the most money was the dominant value.The linking of ethical behaviour to reputation makes theeffective management of reputational risk and ethical businessconduct an integral part of what drives company success.Economic performance alone no longer guarantees successand defaulting to what’s legal doesn’t cut it anymore, as globalbrand giants such as Google, Apple, Amazon and Starbucksare finding in the UK where they have been held to widespreadpublic account for their adherence to tax minimising regimesthat offshore their profits. UK consumers have been busy notonly venting their anger in internet forums but also taking directaction by boycotting Starbuck stores. Such was the pressureof public opinion that Starbuck’s management had to quicklymove from its position of defending its legal position, to bowingto public pressure and social media campaigns; it has nowoffered to pay an additional £20 million in tax. In what was seenas an additional attempt to ward off further consumer backlash– or as they say in corporate social responsibility speak, ‘toretain its social licence to operate’ – its UK managing director,Kris Engskov, went even further by announcing that thecompany would pay ‘a significant amount of tax during 2013and 2014 regardless of whether the company is profitable’.According to the field research, the top ethical issuesconfronting business institutions today revolve around:• Insider trading (see box for example)• Illegal political contributions• Environmental violations• Health or safety violations• Improper contracts• Contract violations• Improper use of competitor’s information• Anti-competitive practices• Sexual harassment• Substance abuse• Stealing.
  7. 7. Institute of Chartered Accountants Australia    7   Applied business ethics in Australia is at a different stageof maturity than in other parts of the world. In Europe andthe US, business ethics is recognised as a managementdiscipline informed by a comprehensive body of fieldresearch that is used to inform business managementpractice. The Washington-based Ethics Resources Centre,for example, conducts annual surveys mapping thechanging ethical landscape of American businesses andbenchmarking their performances against their peers. TheUK Business Ethics Institute conducts similar research andworks closely with business leaders to benchmark ethicalstandards in Britain, and the European Business EthicsNetwork brings academics and practitioners together toshare best practices in Europe. Leading global consultingfirms produce regular ‘ethical pulse checks’. Examplesinclude KPMG’s Global Anti-bribery & Corruption surveys,E&Y’s Global Fraud surveys, PWC’s Business Ethics &Directors surveys, and Deloitte’s Ethics & Workplace surveys.In contrast, in Australia, business ethics is still seen as adiscretionary endeavour and the scant research conductedrevolves around individual perceptions and attitudes, divorcedfrom any analysis of the organisational context that shapesthese. It focuses on the players and misses the bigger pictureabout how the game is being played. The limited research thatexists, however, does indicate that Australian managers andemployees face exactly the same organisational pressures astheir counterparts in other countries and that these pressuresgive rise to the same ethical issues and challenges.Unethical and corrupt business conduct has encouragedlegislators around the globe to mandate organisational whistle-blowing mechanisms as a minimum organisational safety netagainst systemic unethical practices. Implicit in this mandate isthe recognition that ethical conduct and organisational culture isnot beyond management control; it is instead the outcome of theways leaders set their organisational context so that employeesare encouraged or inhibited to observe ethical and legal standardsand are rewarded or penalised for their ethical conduct.The cultural nature of business ethics is made more explicit inthe US, where the Federal Sentencing Guidelines (1991) providea framework for imposing criminal penalties on organisationsthat commit offences according to whether they have aneffective compliance and ethics program in place. Regularlyupdated to reflect changing social expectations, the guidelineshave led to the creation or enhancement of business ethicsprograms by thousands of companies across the US, andcreated the position of ‘ethics and compliance officer’ withinall publicly listed companies. In a similar development, theUK Bribery Act (2001) recognises the power of organisationalleaders to shape organisational culture. The most far-reachingAct in the developed world, this legislation holds companydirectors accountable for any unethical or corrupt behaviour,with tough penalties for breaches of the Act, including up to12 years in prison and/or large fines. Here in Australia, theethical dimension is managed in a more informal and reactivemanner. While on paper it might seem thatwe are in step with other countries in encouraging corporatecompliance, regulation is thin on the ground. Amendmentsto the Criminal Code effective since 1999 state that acorporation can be criminally responsible if it is establishedthat ‘a corporate culture existed within the body corporatethat directed, encouraged, tolerated or led to non-compliancewith the relevant provision’ or by showing that ‘the bodycorporate failed to create and maintain a corporate culturethat required compliance with the relevant provision’. However,it took until 2011 for the first person to be charged underthese provisions, despite what appeared to be overwhelmingevidence of bribery and corruption in the case of the AustralianWheat Board and other companies such as Note PrintingAustralia and Securency several high profile cases.The OECD said it was ‘seriously concerned’ with Australia’slack of enforcement of its foreign bribery laws, highlightingthat Australian businesses were highly exposed to foreigncorruption. According to Johnson Winter & Slattery partnerRobert Wyld, the AFP has received 28 allegations of foreignbribery involving Australian companies and individuals since2006. Of these cases, 12 have been evaluated, rejected forinvestigation and terminated, while nine cases were acceptedfor investigation but have been finalised without resulting incharges because of insufficient evidence.The cultural perspective of ethics as a discretionary activityor, worse, the preserve of individual morality, sets the bar ofacceptable business standards lower than in other advancedeconomies while ensuring that Australian regulation remainswedded to a compliance approach. Safeguarding institutionalintegrity remains a subset of risk management rather than acornerstone of organisational cultural development demandingthe constant attention of all C-suite executives.International standards and benchmarkson business ethics management• ISO 1400; SA 8100 & AA1000• UN Guiding Principles on Business andHuman Rights (2012)• U.N. Convention against Corruption (UNCAC)• OECD Guidelines on Multinational enterprises• ILO Core Conventions• International Covenant on Economic, Social andCultural Rights (ICESCR)• Equator Principles• Global Reporting Initiative (GRI)• World Business Council Sustainable Development• Ethical Trading Initiative• EU Strategy on corporate social responsibility• Transparency International Global Index on Corruption.Global perspectives onintegrity management
  8. 8.   Why Business Ethics Matter to Your Bottom Line8 Business ethics is now generally regarded as a form ofapplied ethics or professional ethics, which examinesahead of time the ethical principles and issues that mayarise in a business environment. It applies to all aspectsof business conduct from how it develops, produces anddelivers its products and services, to its interactions withits customers, suppliers, employees and wider society.Business ethics is widely recognised in most developedcountries (as well as in emerging economies includingChina and India) as a social science where the study ofchanging social expectations of business as one vitallyimportant element of a well-functioning society is criticalto sustaining progressive economies.To this end, business ethics advocates seek to challenge thecultural legitimacy of assumptions such as agency theory,which promoted the idea that business managers wereonly driven by self-interest. The theory is they need to beincentivised to align their interests with shareholders. Theaccompanying premise is that business’s primary role is todeliver maximum shareholder benefits. Many argue thatagency theory became a self-fulfilling prophecy that led tothe emergence of managerial elite that legitimised obsceneincentive packages and helped to spawn a generation of amoralmanagers. According to two studies in the US of graduates ofbusiness schools, ‘amoral management’ has been identifiedas both intentional and unintentional. Intentional amoralmanagement practices occur where managers operate froma mindset that separates business and ethics in two separaterealms. Unintentional amoral management, the studiessuggest, emerges where managers fail to canvass the ethicalimpacts of their decisions and actions. This was most evidentin the financial markets at the time of the GFC and wasgraphically illustrated by the Goldman Sachs case of someinvestment banks creating toxic debt products in order tobet against the market recovering.There is an emerging body of field research into how workplacecontexts shape managerial and employee behaviour, thatsuggests that employee ethics are malleable and dynamic,with individuals taking their behavioural cues from the socialmessaging of their organisations in order to succeed. Socialpsychology highlights that many people are likely to commitseriously unethical acts in situations that share powerful anddistinctive features, including the power dynamics embeddedin workplace hierarchies. These typically result in thedepersonalisation that typifies large workplaces and enablesindividuals to abdicate personal accountability. It means thatmanagers and employees can find themselves behavinginconsistently across different situations. This ‘argenticshift’, first identified by Stanley Milgram’s Yale research onobedience to authority and later supported by Stanford’sprison experiment, suggests that there can be an erosion ofagency within organisations to the point where individualssimply follow directives. In both these famous research studies,participants were found to behave in ways consistent withthe context they found themselves in, even if it was stronglyinconsistent with their personal ethical standards. It is generallyagreed that situational and social forces are more importantthan individual differences in explaining unethical behaviour.Global research suggests that boards are slow to recogniseand be accountable for the integrity of the organisationsthey steer. According to E&Y’s 2011 global survey, as manyas 52% of C-suite executives think their boards are out oftouch in understanding the ethical issues facing the business,and especially so in rapid-growth markets.In Australia, narrow assumptions around what constitutesthe appropriate ‘tone at the top’ has similarly left a legacy ofinitiatives that focus on promoting individual morality, the latestbeing the 2012 Australian Bankers Oath. There is no substitutefor boards insisting on appropriate systems to monitor,promote, reward and support collective ethical standards.There is already much criticism around the lack of diversityat Australian board level – not just in gender terms but also interms of world views. The composition of Australian boards,while slowly changing, is well-seasoned in what’s legal butsometimes less confident in the new values and expectationsof stakeholder capitalism. These revolve around corporatesocial responsibility, sustainability and what the public regardas fair and ethical business practices. The boards of iconicAustralian institutions such as the Reserve Bank, Qantas,Telstra, Pacific Dunlop, Amcor, AWB, Rio Tinto, James Hardieand the major Australian retail banks have all experiencedthe blowtorch of stakeholder criticism in recent years.These boards were held to account not for poor employeeethical standards but for the unethical and sometimes illegalinstitutional business practices that were by-products of theirorganisational cultures. For Qantas, Amcor and Visy, theserevolved around price-fixing in the marketplace; for JamesHardie around failures of corporate governance; for Telstraalleged abuse of market power and for the banks aroundquestionable lending practices.The limitations of complianceof C-suite executivesthink their boardsare out of touch inunderstanding theethical issues facingthe business.52%
  9. 9. Institute of Chartered Accountants Australia    9   The huge costs recently incurred by Starbucks are onlythe tip of the iceberg of the combined costs of unethicalbehaviour. Other examples include:• In November 2012, UBS was fined £29.7 million for failuresin its systems and controls that allowed former employeeKweku Adoboli to conduct Britain’s biggest bank fraud• In December 2012, HSBC agreed to pay a record$1.92 billion to settle charges that the banking giantviolated US sanctions by transferring billions of dollarsfor prohibited nations, it enabled Mexican drug cartelsto launder tainted money through the American financialsystem, and it worked closely with Saudi Arabian bankslinked to terrorist organisations• In 2012, Barclays was fined £290 million for manipulatingkey interest rates• In April 2012, the New York Times reported that a 2005internal investigation at Wal-Mart found evidence thatexecutives in the company’s Mexican subsidiary paid morethan $24 million in bribes to officials in ‘virtually every cornerof the country’ to clear the way for the rapid expansionof the retail empire. The allegations are unusual in thatknowledge of wrongdoing is said to have subsequentlyreached the top of the organisation. The newspaper reportsthat the company is now under investigation for possibleviolations of the Foreign Corrupt Practices Act• In 2010, Rio Tinto made headlines when four employeesfrom the mining giant were charged with bribery andstealing trade secrets in China• In 2010, Daimler, the German car maker, agreed to pay a$185 million fine for bribing foreign government officials,including Russian and Chinese officials• In 2009, L’Oréal, the French cosmetics giant, was foundguilty of racial discrimination for barring black, Arab andAsian women from selling its shampoo• In 2009, engineering giant KBR settled a Nigerian corruptioncase for $579 million• In 2008, the Swiss agriculture and chemicals companySyngenta was fined for pesticide-related infringements,and one of its former employees was awarded nearly$2 million after she was wrongly fired for reportingdiscrimination in the workplace• In 2008, Siemens settled a global corruption case for$1.6 billion.Following its prosecutions in the UK for paying bribes,defence systems company BAE commissioned a far reachingreport into best practise in ensuring institutional integrity.The research looked at ethics management systems andprocess of 12 global companies from the US, the UK andEurope. It concluded by saying:‘A company should aim to develop an organisationalculture that is self-policing and that positivelyencourages concerns about ethical behaviour tobe raised at all levels and in all locations.’For directors it recommended boards must not only ensurethat ethical conduct and the impact of ethical risk are explicitlytaken into account, but that this is also reflected in decision-making throughout the company at all levels and adhered toin the face of financial and operational pressures.Standard ethics and complianceprograms include:• Charging the leadership team with accountabilityfor establishing ethical cultures• Publishing a code plus other directional documents• Deploying global training and communications toall employees• Managing the global Ethics and Compliance Line• Administering annual certification process, reportingon issues raised & on violations.The high cost of failure to manageethics at work
  10. 10. According to the 2011 biennial National Business EthicsSurvey from the Washington-based Ethics ResourceCenter (ERC), the percentage of employees who perceivedpressure to compromise standards in order to do theirjobs has increased while retaliation against employeewhistle blowers has also risen sharply. Employees’cynicism regarding the tone being set from the tophas similarly increased.ERC surveys consistently show that there’s a very strongcorrelation between a strong ethical culture and lowerobserved misconduct. In 2011, misconduct was observedin only 29% of companies with a strong ethical culture butseen in 90% of those with a weak ethical culture. Pressureto compromise ethical standards was felt in 33% of companieshaving a weak ethical culture versus only 7% where theethical culture was strong. Employees in companies withweak cultures failed to report observed misconduct 48% ofthe time, but only 6% of employees in companies with strongcultures didn’t report misconduct they observed. Retaliationafter reporting misconduct was also more prevalent inweaker cultures.A 2012 survey by the UK Ethics Centre of 500 financialservices professional across the US and the UK resultedin some likewise alarming statistics:30% of respondents said that their organisation’scompensation plan created pressure tocompromise ethical standards or break the law24% of respondents said that financial servicesprofessionals may need to engage in unethicalor illegal conduct to be successful39% of respondents said that their competitorsare likely to have engaged in illegal or unethicalactivity to be successful26% of respondents indicated that they hadobserved or had firsthand knowledge of wrongdoing in the workplace20% of respondents said they were unsure orhad serious doubts about how their employerswould handle a report of wrongdoing22% of female respondents said they would beretaliated against if they reported wrongdoingin the workplaceIn Australia, according to a 2010 KPMG report 51% ofrespondents said they experienced unethical behaviour atwork, while a similar survey of professionals in 2009 found thatone in four respondents believed their organisations could domore to promote ethical standards. The same number reportedthat profits or funding concerns had a higher priority thanethical standards.The impact of ongoing changeon institutional integrity  Why BUSINESS Ethics Matter to Your Bottom Line10 
  11. 11. Institute of Chartered Accountants Australia    11   While the picture so far might appear mostly doomand gloom, there are many upsides and ‘green shoots’of ethical performance.The Hay Group’s annual survey of The World’s Most AdmiredCompanies (WoMACs) highlights just how much themanagement of culture matters. The results show that theworld’s best performing companies by shareholder valueare also the ones that value the importance of culture andplace priorities on promoting positive people managementpractices and systems. WoMACs were found to haveoutperformed average shareholder growth, which hasaveraged approximately 12% per annum for more than100 years, and by about 3–5% per annum. That representsa premium over standard shareholder value performanceof about a quarter to two-fifths above normal returns.The US-based think-tank, Ethisphere, also charted the stockperformance of publicly traded award winners from 2007,and noted that the most ethical companies consistently andsignificantly outperformed the S&P500 by more than double.Another US-based research and advisory firm, CorporateExecutive Board, also confirmed that companies with highintegrity capital enjoy financial benefits. Their research showsthat integrity leaders incur only one-eighth the costs ofmisconduct than competitors, and have 12% lower labourcosts because their employees invest more discretionaryeffort. CEB attributes these two organisational integritydynamics as key factors in delivering shareholder returns5.8% higher than the average company.Another important green shoot is the clear link betweeninstitutional integrity and employee engagement. Gallup’sresearch on employee engagement shows that organisationswith highly engaged teams outperform their competitors by26% in gross margin and 85% in sales growth. In Australia,UTS Emeritus Professor Dexter Dunphy has shown thatorganisations with staff that are highly engaged tend tobe places where there is genuine alignment betweeninstitutional values and corporate social responsibilityobjectives, thus bucking the western trend towards lowerlevels of employee engagement.At a global level, research points to a seismic values shift,with a new generation demanding ethical ambition amongits employers. Net Impact’s research What Workers Want in2012 found 61 to 70% of people across all generations believethey have a responsibility to make society better rather thanleave it to the future. Employees who were able to makea positive impact through their workplace reported beingmore engaged and twice as satisfied with work as thosedenied this opportunity.In another study titled The Workforce Crisis, workplace changeexpert Tamara Erickson examined ten work expectations ofbaby boomers, Gen X and Gen Y, and found while there wereno significant differences in their underlying values, therewere differences in their expectations. Younger generationsdemonstrated a greater expectation for ‘more transparentattitudes on requiring a strong ethical leadership brand inthe companies for which they work’.Australian research linkspeople management to profitsGround-breaking research examining 78 Australianorganisations has provided hard evidence of the correlationbetween best-practice leadership and bottom-line results.The study, conducted by the University of NSW, AustralianNational University and Copenhagen Business Schoolreleased in 2011, found that companies which focus onintangible assets such as innovation, leadership, fairness,employee and customer experience – as well as financialindicators – were nearly three times more profitable thantheir peers. Leaders in the best performing companies,according to the Leadership, Culture and ManagementPractices of High-Performing Workplaces in Australiareport, spend far more time and effort managing staff,are more inclined to give employees ample recognition,and can articulate a clear vision and goals.The business benefits oforganisational integrityof people across allgenerations believe theyhave a responsibilityto make societybetter rather thanleave it to the future.61-70%
  12. 12.   Why Business Ethics Matter to Your Bottom Line12 There are a growing number of leaders who are preparedto stand up and be counted for their ethical acumen.They have moved beyond the values rhetoric to embeddingtheir values into day-to-day organisational practices.General Electric chief executive, Jeff Immelt, has been namedone of the ‘World’s Best CEOs’ three times & GE named‘America’s Most Admired Company’ by Fortune magazine.GE has also received the gong one of ‘The World’s MostRespected Companies’ from the Financial Times.Immelt’s message to business leaders talks to the zeitgeistof the times:‘This is a time when the world isn’t going to be thesame. Now is a time when people want a reason tobelieve in their leaders; they want to be involvedin creating a new story that is geared to producea better and more equitable future. This is a timewhen leaders are being asked to sign up to a higheraccountability to the people they seek to lead; torebuild trust and engagement with the challengeson hand. No one promises the landscape will beeasy, but neither will would-be leaders be allowedto escape public scrutiny.’Businesses of the future recognise that there is a fundamentalreadjustment going on from a rules-based society to aprinciples-based society. These leaders understand the rolethey can play in enhancing not only business success, butoverall societal well-being. They know that ethical leadershipinvolves managers leading by example. They put strongboundaries on competitive behaviour even as they recognisethat they are operating in adversarial markets. They insist onmore attention to good governance rather than hiding behindoutdated notions of total control. They are the employers ofchoice because they are responding to a new generation ofemployees looking for organisations with a comparable setof values, and a responsible attitude towards their community.Their business models appreciate the importance of businesswith purpose, organisational integrity as the basis of employeeengagement and satisfaction, and ethical standards as thebasis for sustainability. Traditional transactional command-and-control leaders have given way to these transformational oneswho work on culture, bring their people with them, instil pridein the mission of the enterprise, and deliver benefits tothe societies from which they profit.Sir Stuart Rose, the former Marks & Spencer chairman, isone such transformational leader. His Plan A eco-initiative in2007 set out 100 ethical and sustainability targets. Anotheris Paul Polman, the chief executive of consumer goodsgiant Unilever. He throws down the gauntlet to recalcitrantleaders when he says he doesn’t believe fiduciary duty is toput shareholders first. Instead, his focus is on the companyimproving the lives of the world’s citizens and coming upwith genuine sustainable solutions – ultimately, this willresult in better shareholder returns.Polman points to the growing number of high-performancecompanies that are continually working on their corporatecultures to fuse high performance with high integrity. Examplesinclude Proctor & Gamble, Coca Cola, Novo Nordisk, Danone,Nike, Heineken, DSM, Novartis, Interface Inc and Patagonia.Together these companies are helping to create a critical massfor change by pushing sustainability through their global supplychains and transforming how business gets done. Perhapsthe poster child for this new era in business is best capturedin Google’s culture statement: ‘You can make money withoutdoing evil’.Top organisational measures to promotean ethical cultureConsistent findings from annual ethics and fraudsurveys by the global accountancy firms agree following5 key steps:Step 1 Implementation of proper guidelines and policiesStep 2 Regular employee educationStep 3 Regular identification and prioritisation of risksStep 4 Ongoing evaluation of mitigating controlsStep 5 Continuous monitoring.Leaders in institutional integrity
  13. 13. Institute of Chartered Accountants Australia    13   Enlightened organisational leaders are beginning torealise that there are a lot of preventative measuresthat can and should be used to lower the incidenceof marketplace failure. Tone at the top is about boardsand business leaders accepting their role in buildinginstitutional integrity capital to ensure that everymanager is capable of managing the ethical dimensioninherent in every business decision. But just as importantis ‘the mood in the middle’. Leadership from the top isvital to successfully changing a toxic culture, and so isthe critical role of middle managers in not only acceptingthe need for change but also being the championsof that change. We say that ‘people listen with theireyes’; in other words they look at what behaviours arerecognised and rewarded and take their lead from those.According to Corporate Executive Board (CEB) research,organisations with ‘integrity capital’ have lower levels ofmisconduct along with higher levels of reporting whenemployees do witness wrongdoing. They argue that integritycapital is embedded in the culture, not instituted throughcontrols, and it helps shape employee behaviour, whichcould include defrauding the company or offering bribesto get business. Their research identifies five key factorsin building organisational integrity:1. Management takes action when it becomes aware ofmisconduct2. Employees are comfortable speaking up about misconductand don’t fear retaliation3. Senior leaders and managers treat employees with respect.4. Managers hold employees accountable5. High levels of trust exist among colleagues.However, putting a robust organisational integrity system inplace takes time and requires commitment to ethical leadershipthat is often missing. The best protection any corporationcan put in place is not a regime of compliance but a cultureof integrity.Theboard’sroleinbuildingorganisationalintegrity*• Participating in setting and safeguarding the valuesand standards for the business• Think strategically about corporate responsibilityin the context of market pressures• Being constructive about regulation, deliveringself-regulation and supporting government interventionto correct market failure• Aligning performance management, rewardingresponsible success over the long-term• Advocating for a culture of integrity, setting the righttone at the top and cultivating the right values in thecorporate culture• Ensuring internal controls exist beyond paper andare embedded in daily practices.* Key recommendations for board directors from a report commissioned by agroup of leading UK institutions: Business in the Community, About FTSE Group,Insight Investment Dec 2005.Business ethics as the basisof business strength
  14. 14.   Why Business Ethics Matter to Your Bottom Line14 What gets measured gets done and organisational cultureis no different. At its simplest, organisational culturerefers to the shared practices, behaviour standards andunderlying assumptions that guide how people chooseto act at work. It is the regular measurement andmanagement of culture that differentiates high-performingorganisations from their peers. Leaders need to lifttheir standards beyond the letter of the law, embracinga spirit that encompasses a duty of care to protect thecommon good.• CEOs must put in place an ethical management frameworkthat encourages and rewards the right behaviour, whileexposing and sanctioning inappropriate behaviour• Boards of directors need to motivate CEOs to managetheir organisation’s culture by ensuring that remunerationpackages reward culture builders and not just bottomline inflators. Incentives should promote long-termaccountabilities that align executives’ self-interests withcollective interests. Regular ethical cultural reviews shouldbe undertaken as part of effective risk management• Industry bodies, too, must play their part. They shouldconduct relevant field research to identify systemic sourcesof unethical behaviour in each sector and then build soundmetrics and initiatives designed to raise industry standards• Institutional investors can contribute to raising standardsby moving beyond the prevailing preoccupation with short-term results. They can recognise that sustainable businesspractices often necessitate a long-term perspective tobuilding revenues• External regulatory reform can encourage self-regulation.A legislative framework such as the US Federal SentencingGuidelines for Organisations (FSGO) in 1991 and theSarbanes-Oxley Act in 2002 successfully enlisted businessorganisations in a self-policing effort to deter unethicalbehaviour and move leaders from passive bystanders toactive advocates for an ethical workplace culture.It’s time we moved away from focusing on the players tofocusing on business itself. Clearly, there are things thatexecutives and employees must not do in pursuit of profits– this has been profoundly evident over recent years. Asthousands of corporations and millions of workers in theUS can attest, Educating organisational members from thetop down floats all ethical boats upwards. Only by creatingcultures where people understand the impact of their decisionson all stakeholders and where people have a system of ethicaldecision making that has integrity can we build organisationalintegrity and ensure that the marketplace continues to existfor the good of all participants and delivers positive benefitsto the wider societies where it operates.What needs to be done?
  15. 15. Institute of Chartered Accountants Australia    15   
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