Treasury Practice

The only way is ethics

Published: Oct 2013

As large corporations expand globally, their relationships with and sensitivities to the communities in which they operate may naturally deteriorate. Centralisation and outsourcing, for example, can distance the decision-makers from the operational activities of the company. Expansion does not excuse a business from its social responsibilities, but the drivers for discharging these responsibilities may not be as genuine as some companies would have you believe.

Genuine or not, the concept of ethical business practice is nothing new. In the UK, for example, the Quaker involvement in business in the 18th and 19th centuries is well known: the four main chocolate companies of Cadbury, Fry, Rowntree and Terry are fine exponents of genuine corporate care (albeit with an overtly religious agenda).

According to Sir Adrian Cadbury, descendant of the Cadbury family, Quaker businesses not only respected the value of every individual worker (and made sure they were well looked after), but also had a code that insisted they maintain strict integrity in business transactions and in relations with individuals and organisations. It required its employees to be personally scrupulous and responsible in the use of money entrusted to them, and never defrauded public revenue.

Roll forward to 1932 and A.A. Berle and G.C. Means had just published ‘The Modern Corporation and Private Property’, in which they observed that the corporations of the day had grown so large as to have become “a means of organising economic life”. They argued that within such an expanse had formed “a corporate system – as there once was a feudal system – which has attracted to itself a combination of attributes and powers, and has attained a degree of prominence entitling it to be dealt with as a major social institution.” The authors thus asserted that corporate management “have placed the community in a position to demand that the modern corporation serve not only the owners but all society.”

What’s right for you

Operating ‘for the greater good’ is often seen as laudable, but ‘good’ is notoriously difficult to define. But the often impenetrable semantic debates about what is ‘good’ or ‘right’ or ‘just’ can arguably be replaced (at least by tabloid newspapers) by the application of a common sense (if not intuitive) response to a given situation. But does ‘ethical’ really equate to ‘common sense’?

According to the ‘Miniature Guide to Critical Thinking Concepts and Tools’ by Dr. Richard Paul and Dr. Linda Elder (of the Foundation for Critical Thinking), “most people confuse ethics with behaving in accordance with social conventions, religious beliefs and the law”. Instead, they argue, ethics is a standalone concept which can be defined as “a set of concepts and principles that guide us in determining what behaviour helps or harms sentient creatures”. This still leaves the definition of those principles and their application to tackle which takes us back to square one.

Perhaps a vague notion of ‘doing right’ is as good as it gets. In a commercial context, the rise of corporate social responsibility (CSR) programmes in the 1980s and 1990s looked like businesses had caught on that they were (and are) increasingly being judged not only on their ability to deliver goods and services but also the way in which they impact on society and the environment. CSR policies are not necessarily the same as engaging with ethical practices – the former can be an outcome of the latter, but not the other way round – but they have a role to play beyond mere PR trickery by at least opening the corporate mind to ethical practice.

CSR, as typically enshrined in company policy, expresses a desire to minimise destruction of the environment, maximise the preservation of resources for future generations (usually referred to as sustainability) and respect the well-being of staff, customers and other stakeholders and the communities in which they operate.

But balancing the aforementioned depersonalising effects of globalisation and the need to drive profitability – after all, there is no business, ethical or otherwise, without capital – against just criticism (and there are many who rail against all corporates) and a desire to do right is difficult. The pressure to come up with a solution is becoming increasingly urgent as a younger generation of professionals rises up through the ranks, ever-more aware, in a media-saturated world, of the errors of ‘ethical’ judgement made by some corporations.

Indeed, according to a survey carried out by PricewaterhouseCoopers (PwC) in September 2008 (just as Lehman’s hit the wall), graduates place a high value on good corporate behaviour. The survey sought the views of new PwC graduate recruits around the world. The respondents cannot reliably be considered a proxy for all graduates but figures showed that 88% want an employer with social responsibility values that reflect their own and 86% said they would consider leaving an employer whose values no longer aligned.

The age of reason

There is an interesting generational divide in the perception of and response to workplace ethics. US-based non-profit organisation, Ethics Resource Centre’s (ERC) 2013 study highlighted this gap, noting some of the difficulties corporates may face when trying to align organisational and personal values when the latter can be so much at variance. For the purposes of the exercise ERC divided age into the following segments: Traditionalists (64-84); Baby Boomers (45-63); Generation X (30-44); and Millennials or Generation Y (18-29).

On this basis, and through the lens of the current economic environment, it appears younger workers are more willing to close their eyes to corporate misconduct if they think it will help save jobs. There is a sliding scale inversely proportionate to age on this matter, with agreement from 35% of Millennials, 22% of Generation Xs, 17% of Baby Boomers and 12% of Traditionalists.

But the economic downturn will not last forever; companies for whom recruitment of the best young talent (graduate or otherwise) is a key facet of their strategic development would be well-advised to meet this group’s perceived ethical needs now, not least because the age scale tips in the opposite direction when it comes to the perception of an ethical culture and the level of engagement. Indeed, when employees feel they are working in an organisation where ethical conduct matters, they are more likely to be engaged in their job. ERC shows that the level of engagement lessens with age, with a sliding scale ranging from a maximum of 77% for Millennials, 76% of Generation Xs, 72% of Baby Boomers, down to 68% of Traditionalists.

In building an ethical programme that reaches and influences each generation it is essential to pay attention to these differences. ERC’s studies over the years reveal that the younger the worker, “the more social interaction with co-workers will influence their perception of ethical matters”. Conversely, the older the employee, “the more hierarchy, structure and visible company commitment matter” as they get their ethical cues from stated company values and senior management messages.

The impact on profit

If upholding moral integrity is seen as a direct route to profit limitation, the UK-based non-profit organisation, Business in the Community (BITC), has demonstrated otherwise. It has shown that companies’ actively managing and measuring CSR issues financially outperformed their peers by between 3.3% and 7.7% over a five-year period. The Economist Intelligence Unit (EIU) also looked into the commercial viability of CSR and found that 74% of respondents to a 2008 survey said corporate citizenship “can help increase profits at their company”. When asked for their firm’s primary motivation for corporate citizenship, the top three answers all relate to the bottom line: revenue growth (16%), increasing profit (16%) and cost savings (13%). This is not perhaps the most ethical of reasons but if the policies have a genuine positive effect then ‘doing the right thing’ is clearly not a cost centre.

The ethics of investing

Ethical investing has many devotees: in 2011, 12.2% of the $25.2 trillion in total assets under management tracked by Thomson Reuters were involved in what it described as ‘socially responsible investing’. But ethical investing is subjective. It depends entirely on the investor’s view of what is and is not ethical behaviour by a company. Typically, a positive stance is sought on areas such as energy, waste and pollution, natural resource conservation, the treatment of animals, workers’ rights, human rights, supplier and community relations and government interactions. But for some, so-called ‘sin stocks’ (such as pornography, tobacco, alcohol, weapons and gambling) may also be off-limits. In many cases the direct activities of a company may be obvious but its indirect connections may be less so. And just because a company does not fall under an easy ethical heading (such as a green energy business) does not mean it is unethical.

The financial instruments available are much the same as those available to all investors but true ethical investment adds another layer of research (and thus time and effort). Subjectivity aside, investment is typically in companies that aim to create positive change in the world (or at least have a neutral impact). If a business wishes to stand by an ethical investment policy it means looking far beyond company publicity material. The complexity of some funds also means direct or indirect ownership is uncertain, as indeed the Church of England recently found out when it was very publicly pointed out that it was unwittingly investing in the pay-day loan company, Wonga, and thus contravening its own ethical investment policy.

A question of business

In terms of everyday policy, most internal businesses decisions do not require soul-searching but where there is contention, according to Florida-based independent leadership consultant, Dr. Cathy Bush (Ph.D. in industrial and organisational psychology), some decisions that have ethical implications may be difficult for managers to tackle simply because that individual may not have encountered the issue before. “This lack of experience may be characterised by a great deal of ambiguity in terms of what to do,” Bush has noted in a blog. She offers a number of guiding questions that may be used to help resolve the issue (or at least define it as one of an ethical nature):

  • How would you define the problem if you stood on the other side of the fence?

  • What is your intention in making this decision?

  • Who could your decision or action injure?

  • Are you confident that your position will be as valid over a long period of time as it seems now?

  • Could you disclose your decision or action to your boss, CEO, the board of directors, family, or society as a whole without qualm?

The annual ERC report has repeatedly shown that employees who work in organisations with active ethics programmes – and where values such as honesty, respect and trust are seen in action at work – “generally report more positive experiences regarding a range of ethics outcomes”. It lists the following possible improvements:

  • Less pressure on employees to compromise ethics standards.

  • Less observed misconduct at work.

  • Greater willingness to report misconduct.

  • Greater satisfaction with their organisation’s response to misconduct they report.

  • Greater overall satisfaction with their organisations.

  • Greater likelihood of feeling valued by their organisations.

According to the American Society of Association Executives (which represents over 10,000 trade associations and individuals around the world), there are a number of questions that anyone working for a business may ask about that company’s policies and procedures as a way of testing its ethical stance. These include:

  • Why might good people in this organisation do unethical things?

  • What are our organisation’s values?

  • Have we adequately articulated these values internally and externally?

  • Does our organisation have written ethics policies, procedures or structures?

  • To whom is our organisation accountable?

  • What do we mean by success?

  • Does the leadership of our organisation support the idea of an ethical workplace?

Affecting change

In assessing its most recent survey, ERC noted that “ethical conduct improves when the economy cools”. Some 42% said their company had increased efforts to raise awareness about ethics. But ERC’s historical data shows that as the economy improves, misconduct rises and reporting drops as employees feel more confident about their financial position.

The current improvements in perception of ethical behaviour shown by ERC’s study may indicate a general swing towards a more considered approach but more likely, it says, it is a “snapshot of a workforce knocked off its historic trend lines” by a downturn that made people uneasy about job security. Now, as the economy slowly improves, behaviour is in the process of returning to the patterns seen in past studies.

Indeed, ERC reports “ominous warning signs of a potentially significant ethics decline ahead”. It notes that retaliation against employee whistle-blowers “rose sharply”, with 22% of those who reported misconduct claiming they experienced some form of retaliation in return in 2011. In 2007 the figure was 12% and in 2009 it was 15%. The number of employees who faced pressure to compromise standards in order to do their jobs rose from 8% in 2009 to 13% in 2011. Weak ethics cultures were perceived to be in 42% of businesses, up from 35% in 2009’s survey.

Fluctuations in perceptions of ethical performance according to the prevailing economic environment suggest that whilst not mutually exclusive, business and ethics can make awkward bedfellows at times, even if it is difficult to state categorically what ethics actually means in practice. It is apparent too that pretending to be as pure as the driven snow is an act increasingly difficult to maintain. But the publicity generated by perceived ethical transgressions can damage corporate reputation irreparably, thus the pressure to perform should serve as a counterweight to any loss of ‘ethical’ focus. Whether the re-alignment of business stance to meet the views of stakeholders is driven by a genuine desire to ‘do the right thing’ or by the need to offset bad PR remains a matter of choice and conscience.

Either way, companies must be aware that there are many activists who will be only too happy to highlight acts of hypocrisy – any failure to respond positively to the just criticisms of an ever-watchful world is sheer folly. Ultimately, if the outcomes are the same, perhaps it does not really matter if a business is genuinely concerned about its impact on the world or is merely engaged in a PR stunt. After all, Adam Smith wrote in ‘The Wealth of Nations’ (1776) when discussing the impact of market competition on individual behaviour: “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

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