Never has an ethical approach to business been more important. Corporate reputations can be built or shredded almost instantly in this age of increased transparency, government regulation, and public scrutiny. The corruption scandal enveloping Rolls-Royce and the exposure of Volkswagen’s practice of falsifying diesel emissions data are recent examples of unethical behaviours affecting a company’s bottom line, and the tide of public opinion seems to be forcing organisations to urgently recognise the importance of ethical practices.
“It comes down to the level of trust in all kinds of relationships – with the consumer and with the employee,” explains Tanya Barman, CIMA’s associate director, ethics. “Wherever it comes to light that a company has bad ethics, it can undermine every single relationship the organisation has.”
Referring to the work of Professor George Serafeim of Harvard Business School, who says that one of the key impacts of bribery is on staff morale, beyond any fine or regulatory action, Barman adds: “Beyond the initial fine or punishment, the company’s performance goes down, and you have this two-, three-, four-year lag because of the impact internally on management time and effort being used up, and the [negative] effect on the current team and staff coming in.
“It also determines who may want to work with the company, and it could result in a weaker bargaining position in future negotiations. In effect, the increased profits that may be gained from corrupt or unethical behaviour are likely to be wiped out further down the line as trust is eroded.”
On that basis, is it safe to think that there is a powerful onus on companies and other organisations to act ethically – especially in the current age of digital communication and social media, which enables unhappy customers, employees, and competitors to reach a global audience instantly? Yes, says Barman: “There are many more eyes watching, there is higher expectation, and the whole impact on society is understood.”
She adds that the level of scrutiny has been ratcheted up globally in the last five years, on the back of the financial crisis and concerns over sustainability.
“I don’t think there is a country or market where somebody isn’t looking at these issues,” says Barman, who previously worked in organisational development, advocacy, and management roles in commercial and not-for-profit organisations in the UK, US, South Africa, and Asia.
A 2014 CGMA ethics survey revealed that ethical performance is growing in importance for leadership teams, with the reputational view of stakeholders (80%) being cited as the biggest motivation to embed ethical standards. The survey revealed CGMAs believe good ethical conduct has a payback and brings value across a variety of areas. In order to improve standards, companies may need to collect more ethical management information to allow assessment of the organisation’s ethical performance, such as the efficacy of relevant policies, occurrence of breaches of policies or codes, stakeholder opinion, and other metrics.
Although there is demand for this among investors, regulators, and, more broadly, society – especially from countries heavily involved in the supply chain such as Zambia, Pakistan, and Sri Lanka – the response in terms of organisations tracking such information has not always been overwhelming. The 2015 CGMA Managing Responsible Business survey showed that despite growing interest in ethical information, just 36% of businesses collect and 41% report on ethical management information.
Though there are many reasons why companies are not always able to produce detailed information in this area, Barman says that many companies far removed from the public glare feel less willing to present information. There is also the constant churn of management teams and corporate takeovers that can undermine efforts to develop long-term ethical programmes.
Then there is the changing nature of corporates, with many of the most successful companies in each sector operating virtual structures, which potentially limits the prospect of good governance practices.
But despite these challenges, the welter of legislation and broader societal pressures on corporates to adopt more ethical approaches is only likely to grow. Legislation such as the 2010 UK Bribery Act, the US Foreign Corrupt Practices Act, and an increase in focus on prosecuting individual executives, combined with professional codes (including the CIMA Code of Ethics, which will incorporate the non-compliance with laws and regulations (NOCLAR) standard in its next iteration – see box), will push boards to focus carefully on how they are seen to be addressing issues such as preventing corruption and responding to reports of unethical practices.
“Although there has not yet been a big test case looking at the duty of a company to prevent corruption resulting from the Bribery Act, UK individual prosecutions are beginning to be explored around a duty to prevent,” advises Barman. “Culture is a big part of that issue.”
While Barman acknowledges that it is almost impossible to prevent unethical practices occurring in the peripheries of an organisation, she argues that the onus must be on corporates to develop a culture that minimises the likelihood of such behaviour and offers the means – such as a whistleblowing hotline – to be as reactive as possible. “Companies that are most able to track these issues and understand what’s going on across the organisation, possibly reflected in integrated reporting, are more likely to be successful in the long term,” says Barman. “That ties in with how CIMA and the AICPA try to promote the analysis of ethical information in organisations.”
Barman says management accountants can play a key role in driving more ethical practices in their organisations. They are well placed to assess available information and use it to gain insight into both addressing risks and creating opportunities. This can be used to measure effectiveness of activities and recommend action.
“Because they’re trained to deal with data and information, management accountants should be best placed to notice when there are anomalies or red flags, and find ways to challenge or find solutions to difficult situations or find alternative routes,” says Barman.
Read more: Managing responsible business on CGMA.org
JOINING THE CULTURE CLUB
The ultimate aim of companies seeking to build a more resilient approach against corruption and related issues is to build an ethical culture. Without this at the core, many people will not trust whistleblowing or ethical advice hotlines, says CIMA’s Tanya Barman.
Referring to a recent survey by the UK’s Banking Standards Board (BSB), she says it was positive that 80% of those surveyed agreed that their colleagues and management were ethical. “What I also found interesting is that the BSB survey said a lot of people felt they could challenge their managers – that’s a really good sign they could speak out,” she says, if they can.
The 2015 CGMA Managing Responsible Business report found that four-fifths of respondents recognised managing ethical performance as a specific part of their roles, while more than threequarters said managers set a good example of ethical behaviour. But more than one in four agreed that management sees those who report concerns about unethical or dishonest behaviour as troublemakers.
As such there are many ways of interpreting how well an ethical culture is becoming embedded in an organisation, says Barman. But she says the good news is that people are aware of the issues, are questioning them, and are discussing them. It’s also helped that the global investor community, increasingly interested in long-term and sustainable value creation, has taken a keener interest in companies’ ethical policies. “I think it’s very positive that a large number of investors are signed up for the Principles for Responsible Investment,” she adds.
“Ethics is more broadly about doing things the right way, being open, being transparent,” says Barman. “Do you feel comfortable letting people know the way you do things or the way that things are? If not, there’s something that’s not quite right.”
THE NOCLAR STANDARD
The next iteration of the CIMA/CGMA Code of Ethics will incorporate NOCLAR (non-compliance with laws and regulations), an international ethics standard for auditors and other professional accountants due to be effective from 15 July 2017.
It sets out a first-of-its-kind framework to guide professional accountants in what actions to take in the public interest when they become aware of a potential illegal act committed by a client or employee.
The International Ethics Standards Board (IESBA) of the International Federation of Accountants (IFAC), which has been engaged in a consultation process with member associations on integrating the standard into their codes, defines NOCLAR as: “Any act of omission or commission, intentional or unintentional, committed by a client or employer, including by management or by others working for or under the direction of the client or employer, which is contrary to prevailing laws or regulations. The laws and regulations covered, violations of which are acts of NOCLAR, are those that directly affect the client’s or the employing organisation’s financial statements or its business in a material or fundamental way.”
IFAC says the standard will stimulate greater accountability among organisations and help protect stakeholders and the general public from substantial harm.