BEST PRACTICE: Businesses face an unprecedented challenge to survive in an increasingly hostile economic climate while maintaining high ethical standards.
Declared ethical principles in business are laudable but words are cheap. What really matters is whether – and how – an organisation translates ethical standards and corporate social responsibility into standard business practice.
Even when there is a will to “walk the walk”, as well as “talk the talk”, commercial pressures can be overwhelming.
But the pressure is also on for companies to guarantee business ethics, and to root out and fire corrupt employees who pay bribes. Apart from moral considerations, punitive action by the state is getting tougher.
What is understood by business ethics is a question which would test a moral philosopher. However, business ethics can be defined as the application of ethical values to business behaviour.
“It is about ‘how’ you do business not ‘what’ you do,” says Institute of Business Ethics (IBE) director Philippa Foster Back.
She says: “It means respecting the law, of course, but it also means taking voluntary, proactive measures to ensure that a company’s activities do not infringe upon the interests of the ‘common good’, in all spheres of human activity.”
Peter Talibart, an employment law specialist and partner at inter¬national legal practice Norton Rose, says: “Business ethics is, in my view, a form of conflict analysis. The conflict in question is that of profits versus conscience. The downside of following conscience may be loss of profits.”
Leo Martin, director of standards assessors GoodCorporation, boils business ethics down to “fair and responsible treatment of all persons and entities a business interacts with”.
But he says: “All too often ethical standards and codes of conduct are developed centrally and sent out to worldwide operations with a great fanfare. Within months this activity is forgotten and senior executives do little to follow it up with their own actions and attitudes.”
TONE FROM THE TOP
Best practice, in the view of the IBE, involves final approval of a company’s ethical code by the board of directors with the chief executive leading by example and setting the tone from the top.
“It is very important that the right example is set as people pick up more by watching and learning be-haviours from those more senior to them, as it is often perceived as the ‘way to get on’,” says Ms Foster Back.
“Many corporate ethical scandals have actually occurred in the board-room so executives need to look to themselves in the first instance.”
Peter Brooke, director of financial services for Navigant Consulting in Europe, says: “The key to successful compliance is senior-management engagement. The top team must all set the right example with their own behaviour and attitudes, and they must be seen to monitor how their business performs at all levels.”
But can companies be trusted? The theory of the laissez-faire period of the past 30 years was that companies would not do anything to undermine shareholder value, including breaking the law, engag-ing in grey practices or risk ruining their business reputation.
As Brook Horowitz at the Inter¬national Business Leaders Forum (IBLF) points out: “Now, during and after the financial crisis, we are in a world of greater state regulation, control and ownership, and with that the beginnings of a re-definition of some of the key tenets of capitalism: that business should now return stakeholder value, not just shareholder value.”
Under the 2006 Companies Act businesses have to give at least some consideration to non-shareholders, such as employees, customers and communities, according to leading business lawyer, Eoin O’Shea, a partner with Lawrence Graham LLP.
“Good businesses will usually be good employers and those which are not will find themselves losing out, other factors being equal,” he says.
Business ethics should be monitored, in the first instance, internally through employee questionnaires and other feedback mechanisms, says the IBE’s Ms Foster Back.
ACCESS ALL AREAS
“Internal audit has an important role to play as the auditors have access to all areas within the company and can often – if sensitised to look for this – spot unethical practices,” she says.
“In addition, a company should have a ‘speak-up’ policy and mechanisms in place for employees to raise concerns confidentially if they feel they cannot do so with their line manager. It must be a ‘safe’ system for them to use, with feedback too.”
A dedicated internal review procedure can often form the basis for an external review and there are many companies in the marketplace offering such non-financial audit services.
But to really translate ethical standards into standard practice it is necessary to make applied busi-ness ethics part of everyone’s responsibility, says Ms Foster Back.
The translation from fine words to good acts can be further enhanced through appraisal and remuneration schemes, as well as engagement with all employees via the manage¬ment or business chain. “Ethical standards should be embedded in the corporate strategy as part of the DNA of the company,” she says.
Doing ethical – and not only financial and legal – due diligence is a key part of any successful business deal, says Hugh Mathew-Jones of PKF accountants and business advisers.
“The most successful businesses are those that pay early attention to a thorough understanding of the business they are conducting, with whom and why,” he says. “Without a clear view of the various business partners – suppliers, customers, regulators, local and national government, and so on – that a business needs to deal with, it is impossible for that business to ensure it is complying with required ethical standards.
“This is particularly important in overseas markets where most businesses lack detailed knowledge and experience.”
Having carried out detailed due diligence, it is then necessary to put in place clear and robust guid-ance as well as systems to achieve the desired ethical standards on an ongoing basis which will need to be continuously monitored to ensure compliance.
Lawrence Graham LLP’s Eoin O’Shea concludes: “Due diligence is important for ensuring that companies are not doing business with unreliable partners or representatives who will, vicariously, lead them into breaking the law and/ or breaches of ethical standards. It should be an ongoing process, not just a one-off.”