Building ethical culture falls under CFO’s remit

Growing complexity in today’s business environment can expose companies to potential conflicts and ethical challenges. CFOs are well placed to understand the issues and solutions and to lead by example in building an ethical culture.

In an era of increasing transparency, investors and other stakeholders are expecting more from organisations and their leaders, finance chiefs say. For example, they want greater transparency about business performance and operations and more adherence to best practice in areas such as sustainability, fair trade, and fair pay for workers and suppliers.

Building robust ethical procedures can help companies understand and meet these demands while reducing the potential for unethical acts at any level of the business.

Elaine Smyth, senior manager–Professional Standards at the Association of International Certified Professional Accountants, said globalisation, new technologies, and the impact of the 2008 financial crisis have all played into the need for CFOs to expand their role in this way.

“The CFO is moving out of the boardroom to take on a more global role,” Smyth said. “Because their role is no longer just about finance, they are expected to lead by example. They therefore often assist the CEO in establishing the company’s code of ethics and conduct.”

Professional code

Members of the Chartered Institute of Management Accountants and the American Institute of CPAs are required to follow their respective ethics codes, which are based on integrity, objectivity, professional competence, due care, confidentiality, and professional behaviour. These qualities are integral to the role of the modern CFO, Smyth said, but embedding a culture of ethics goes much further.

“There are increasing expectations that CFOs are transparent and accountable for the financial position and performance of the organisation,” she said. “It’s therefore essential they build a culture of transparency and integrity, which will mean the information can stand up to scrutiny. The CFO is also accountable for internal controls and reporting any areas of noncompliance, misleading information, or other areas of concern, and for being wary of any conflicts of interest.”

Visceral ownership

CFOs say they must lead by example in this area to protect their own reputation and that of the business.

“Ethics are now the responsibility of the entire executive team, including the CFO,” said Anna Manz, the finance chief of Johnson Matthey, a multinational chemicals and technology company. “The only way to create a meaningfully ethical organisation from top to bottom is through the company’s culture. This starts with the tone set at the top, and the CFO has a key role to play in that.”

Culture and behaviours need to be underpinned by clear policies, with controls to check how they are embedded across the organisation and with internal audits to provide assurance, Manz said.

This “control, process, and assurance” approach is similar to that used for financial controls. Therefore, in many organisations, finance plays a leadership role in delivering it, she said.

All the main group policies should be in one place, said Manz. These should check that all ethical, health and safety, and financial policies are embedded. Every operating unit must adhere to the minimum control standard.

“Having one clear, simple statement for operating units about what the group expects, with mechanics to support them in meeting those standards, makes it much easier to ensure every site understands that responsibility, at a cultural and tactical level, and adheres to it,” she said. “As a CFO I own this viscerally. I need to act as a leader and a role model by asking questions about how a business unit is meeting the group’s ethical standards.”

Manz said the cultural change towards CFOs having a core role in ethics started with the introduction of the Sarbanes-Oxley Act of 2002 in the US and then the Bribery Act 2010 in the UK. “Collectively they brought structure and rigour to how a well-run business should operate,” she said.

Manz said the main ethical obligations and duties for CFOs are about ensuring that leadership has a clear view on the group’s ethical standards, which are enshrined in policy; how embedded the policies are; and how rigorously controlled and audited they are.

“However, by far the most important priority is setting the values and behaviours that define the culture, and ‘role-modelling’ it every day and in every conversation,” she said. “That is often about saying a couple of sentences extra, as silence can be misinterpreted. For example, I never say, ‘Please focus on working capital management.’ I always explain fully what I mean by that — ‘running our business rigorously and efficiently, invoicing the day we ship, collecting overdue debts, and paying our suppliers on time, according to their terms’.

“Being a role model also involves seeking out training in any new legislation, or areas you don’t understand.”

Get the little things right

Patrick Butcher, group CFO at UK-based transport group The Go-Ahead Group, said CFOs should build a culture that avoids putting individuals or the organisation into pressure situations.

“For example, we are a conservative company and only do business where there are stable politics, rule of law, and clean procurement,” Butcher said. “The CFO … also has a special role as a guardian of many business decision-making, monitoring, and transactional processes.

“Often the culture of an organisation is the sum of those processes, and if [a lack of such processes] drives people to short-termism, for example, that would be unethical. Other examples of unethical behaviours would be driving someone to pay below the minimum wage or allowing a loose process with suppliers that creates the potential for [bribes].

“Much of it is about the signals you send in the small decisions, which build into a culture that drives bigger decisions,” said Butcher.

Getting all those little things right, Butcher said, prepares you for when you have a tougher choice.

—Tim Cooper is a freelance writer based in the UK. To comment on this article or to suggest an idea for another article, contact Neil Amato, an FM magazine senior editor, at Neil.Amato@aicpa-cima.com.