Corporate View: Philippa Foster Back, Institute of Business Ethics

Published: Nov 2002

This month we talk to someone who was a senior treasurer, but now heads the UK’s Institute of Business Ethics. The Institute of Business Ethics was established in 1986 to encourage high standards of corporate and business behaviour through raising of the issues and the sharing of best practice.

Philippa Foster Back


Philippa Foster Back was Group Treasurer of Bowater and then Group Finance Director of DG Gardner Group, before joining Thorn EMI as Group Treasurer in 1993. She left Thorn EMI in 2000 to take up the position of Director of the Institute of Business Ethics. She was President of the UK Association of Corporate Treasurers in 1999-2000.

Why are business ethics important?

Business ethics are important because they are the means by which a company explains to itself and to its staff how it wants to do its business. Business ethics come from the top. It is important that the people at the top live by what they say. In other words, there should be no personal ‘say-do’ gap between what people at the top say and what they do.

A company’s code of business ethics starts from determining the values around which it is going to do its business. These are typically indicated by key words such as honesty, integrity, trust, openness, transparency, respect. These values then have to be translated into a code of ethics, although everybody calls it something different. This translation of those values into a code then needs to be embedded into the conduct of everybody in the company through training. It is important that the conduct of the leadership of the company reflects this training, because the staff will always know if it doesn’t.

These three ingredients, values, ethics and conduct, together will give you the culture of the company. The reason why you want to have a strong ethical culture is really to reduce the risk of a reputation crisis.

Are these things that can be easily classified and identified?

It is very difficult because business ethics are discretionary, whereas the law is mandatory. Because it is discretionary, it is actually not a question of morally right or wrong, rather it is the issue of right versus right.

For instance, a bank may offer you tickets to watch a grand prix. If the bank offered to pay for everything from the time you left the office to the time you get back, people might baulk at that and say it is not quite right. It might be more acceptable if the bank were to pay for the ticket and food once you get there. Other people might say you shouldn’t accept the invitation at all. You should also consider the circumstances of the invitation. Are you in the middle of a refinancing? Is this the only bank that you are going to be seeing in this way? Could you reciprocate that sort of invitation?

Within a company’s code, there should be a section entitled gifts and entertainment. You might want to have a section within it relevant to the treasury department which defines the acceptable level and nature of gifts. It is important that the treasury function is not exposed to undue risk that could backfire.

Faced with an ethical dilemma, you can test a decision by asking three questions:

  • The transparency test.

    How would I feel about other people in the company knowing that I am doing this? How would I feel about reading about it in the newspapers? How would I feel if my chairman had to stand up and defend my actions? If you don’t like the answer, it is probably ethically wrong.

  • Who does my decision hurt?

    Is anyone hurt by it? Is it unreasonable? Usually someone will be hurt if you have an ethical dilemma. Is it reasonable in the circumstances? Is there any mitigation to reduce that?

  • Fairness.

    Quite simply, is it fair?

How would a treasury function implement a code of business ethics?

It would be unusual for a treasury function itself to have a separate code of ethics to the company as a whole. There may be some specific things in the company code that need to be developed for the treasury function. These might include areas such as gifts and entertainment, conflicts of interest, bribery & corruption and money laundering. The treasury needs to be particularly aware of potential problems arising in subsidiaries.

Consider a company with a highly centralised treasury function. To what extent can they be and should they be responsible for activities in subsidiary organisations throughout the world?

There is an onus on individuals to take responsibility for their own actions. If they are asked to make payments that raise a question, then it is their duty to challenge. The law on money laundering and bribery and corruption payments is now very strict.

The law also covers facilitation payments. These tend to be small cash face-to-face transactions between an individual or the local agent and a local official. These payments, made by a UK company anywhere are now illegal under UK law. The treasury is unlikely to be aware of smaller payments. However if a company is asked to make a large payment, say £20m, to a government for a licence, then it is likely to be made through the treasury function. The key for treasury is documentation. The treasury needs to make sure that the documentation is absolutely correct as to the nature of the payment and to where it is being made.

How does a code of business ethics fit with other internal procedures?

We would argue that it is an overarching code determining the way that a company does its business. A company then derives the sense of their processes and procedures from that initial code. If there is a problem with one of the processes or procedures, then it can be referred back to the code of ethics.

There is a difference with the USA where ethics are very rulebased. In general many companies have not really explored the underlying values of the ways in which they do business. They say these are the ethical rules by which we do business, i.e. the laws by which we do business.

There are two types of code that a company could draw up. One is an issues-based code, which would address the issues discussed earlier such as gifts and entertainment, as well as things such as conflicts of interest or human rights.

The other way, which is being used more now, is the stakeholder reference. Stakeholders are defined as those with whom the company has a financial relationship. These will include employees, customers, suppliers, the community (through the taxes the company pays) and shareholders. Then there are the other interested parties that include the media as well as non-governmental organisations that a company will interact with although without a financial relationship. That second group might have a much greater influence than the first group, because they can affect the company’s business.

On the whole, I feel that most companies should have a different relationship between the financial stakeholders and the other interested parties. A lot of companies give too much credence to the other interested parties.

Can you explain this further?

There has been a lot of talk about corporate social responsibility recently. Some companies have been listening too much to the other interested parties and not enough to the financial stakeholders. We prefer to use the term corporate responsibility, which includes social and environmental issues and so forth. Corporate responsibility picks up both the other interested parties and the financial stakeholders. However, the core must be the financial stakeholders because the company is in business to provide goods and services.

How does a code of business ethics affect the finance function’s response to protect investments and enhance shareholder value?

I would like to use the term long-term shareholder value. I am hopeful that after all the shenanigans that we have seen in the last nine months that there will be more emphasis put on the return on long-term investment than the short-term. I think that even pension fund managers are going to have to revisit their attitudes and expectations to look more long-term than to look constantly short-term, because I don’t think that the pension fund industry will survive otherwise.

Are there any areas where the finance function has additional responsibilities?

The finance function needs to think beyond the immediate transaction. A company should hold treasury management meetings in such a way that there is a certain framework of documentation that surrounds a particular decision taken under a particular policy. It is also important to document the market circumstances in which a particular decision is taken so that it can be understood in the future.

Treasury also needs to be aware of how it deals. There are many instances when a dealer quotes back the wrong rate. If this is to your advantage, what do you do about it? If you give the dealer the opportunity to check their quote and they still maintain it is correct, then it is OK to deal.

You are implying that part of a financial relationship is to give your partner the opportunity to correct their mistake if something goes wrong rather than to take advantage of it.

Yes, because if you didn’t, then your partner might cease doing business with you as it doesn’t like the way that you conduct yourself. For instance, the business events in the USA have led to some of the banks, whether they acted legally or not, being hit in terms of reputation by the actions of some of the people that they have been dealing with.

What are the potential costs of business ethics?

Ethics are the standards by which a company does its business. There may come a point at which the company is tested as to whether it is prepared to turn away business – that is when ethics costs. We have seen it publicly where some multinational companies have decided not to go into Indonesia or Nigeria. So, although much of the cost is administrative in terms of the consultation and training, there can be a bottom line cost as well.

But there are benefits as well. One of the key things that we haven’t mentioned in the reasons for having an ethics policy is clarity for the staff. It is a first point of reference in the office and if the code is written appropriately in a user-friendly way, then it will get used. There are some codes that have little Q&As that go with them so that most of the typical instances are covered. The finance function could look at their company’s code of business ethics, identify which bits could apply to them and then consider whether there is a need to amplify any parts for the finance staff in this way.

In the end, ethics are about degree and perception, so the right thing to do is to stop and think through the consequences before acting, and if you are at all unsure of what to do then your motto should be to ‘disclose and discuss’.

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