South Africa

Details

  • Service: Advisory, Risk & Compliance
  • Type: Business and industry issue, Press release
  • Date: 2011/03/09

An ethical culture does contribute to business performance 

Most companies tend to conflate codes of conduct and codes of ethics, and fail to understand that while the former is directional (protecting the company, through strict rules, from the risks associated with misconduct), the latter is aspirational (including core values that contribute to building a corporate culture). Furthermore, reporting on corporate ethics performance is also being done in a problematic manner, ranging from vague commitments to negative reporting (on the absence of misconduct, rather than the presence of ethics management). A key element in ensuring the embedding of a code of ethics is the tone emerging from the top of the organisational hierarchy.

These were some of the key ideas emerging from an Audit Committee Forum roundtable seminar, jointly hosted by professional services firm KPMG and the Institute of Directors. Discussant, Dr Schalk Engelbrecht, manager in forensics at KPMG, pointed out that ethics, in a business environment, is a “notoriously difficult subject to broach”.

 

Some of the myths that have developed around unethical corporate behaviour are vested on the notion that it arises out of the actions of a few individuals. In addition, businesses often do not realise that ethical behaviour can add value to their activities, and that managing ethics is about changing an environment rather than weeding out or converting "bad apples".

 

The key elements required to develop, implement and maintain an internal code of ethics include an analysis of ethics risk and opportunity, the subsequent development of a code, the integration of the code in corporate behaviour and reporting on ethics performance. "Every organisation already has a culture. A corporate culture is the unique personality of an organisation, and includes anything from working hours to dress codes. But an ethical organisational culture is one in which employees are empowered and encouraged to act in ethically responsible ways. 

 

"Many commentators believe that the global financial crisis was not due to a failure of regulation, but rather to a failure of ethics. Therefore, to prevent corporate scandals more and more emphasis is being placed on a values-driven approach, as in King, rather than a robust regulatory or legislative approach, like SOX".

 

A key accomplishment would be to move from a mere paper code of ethics to integrated cultural change to embed an ethical approach to business. This would represent a move from the symbolic to a substantive code which would benefit both internal and external stakeholders.

 

The integration of a code of ethics involves an alignment between formal and informal organisational cultural systems. Some key elements of the two spheres involve the reconciliation between executive leadership and myths and stories surrounding them or the orientation and training as they affect corporate mythology. On a more substantive level, the codes, rules and policies of an organisation might have to be revisited to examine the extent to which they address its ethical requirements.

 

To test ethical risks, it might be necessary to survey both employees and stakeholders. This would involve testing the clarity of ethical expectations, transparency of conduct within the organisation, pressure within the company to reach financial targets, and enforcement of an ethics code or management programme.

 

In a case study cited by Engelbrecht, it was shown that the mere introduction of a code of ethics is not enough to ensure its maintenance in a business context. “A code that is not continuously integrated fails to prevent corporate collapses. Even pioneering companies in ethics can fail when fees become more important than integrity, when obedience to organisational authority becomes all-important, when training in the core values of an organisation is neglected, and when ethics ceases to be an acceptable subject for discussion at the office.”

 

Further complicating the issue is the tendency of the business community to report inadequately on ethics performance, for instance. “Often, there are promises rather than reports. Companies tend to say ‘management seeks to comply with the principles set out in the King III Report. That is future-looking, rather than a report. This is not a report on what has been done. Companies also say things like ‘there have been no material incidents of fraud’. This implies that ‘there is fraud, but none of it is material.’ This isn’t reporting on ethics. It ignores reportable factors such as divisional training, hotline report trends, policy and code reviews, ethical risks, and ethics initiatives.”

 

To develop a culture of ethical responsibility, it is necessary to adopt a risk-based approach to ethics. As difficult as this might be, we should look beyond just obvious operational risk, and by addressing ethical risk gain reputational capital. “There is a correlation between financial performance and ethical performance. Companies with good ethical performance are companies that perform better.

 

“The code of ethics is how you build a culture. You need both the code of conduct and a code of ethics. They build trust and a sense of values. While a code of conduct is clear and leaves no room for doubt, the code of ethics allows for discretion and can help establish a sense of values. When values clash, there are no final or correct answers that we can call on experts in ethics to provide. We can only depend on our ethical common ground, of which there is much more than we assume, or we can enter into an inclusive debate, which frequently tends to lead to a decision that everyone will not agree with."