Ethics : Business ethics does pay

What happened with finance companies in New Zealand over the past two years should never be allowed to happen again, says the director of the London-based Institute of Business Ethics Philippa Foster Back.
The recession exposed almost every company to increased audit, not just of financial results, but also into the way they and their employees operated, she says. Too often the stock market and the shareholders that back it were disturbed by the corporate and private behaviour of business leaders.
High markets allowed the exaggeration of prospective profits, legal but morally questionable corporate behaviour, excess and abuse – and all because too few questions were asked.
Foster Back’s message? “Business ethics is common sense.”
Yes, but does it bring in business? Does implementing the processes required to meet high standards and then advertising that fact to the market pay off on the bottom line, or does it just sound fancy and cost money?
Foster Back is unequivocal. “Yes, it does bring more business in, both from existing customers and new ones who hear word-of-mouth. It also attracts good staff and helps retain staff. Business is increasingly recognising the value of it [ethical behaviour] – good businesses always have.”
Part of her work is training the moguls of large multinationals in how to implement strategies to ensure good corporate behaviour at management level, including how to limit both employee theft and corruption, and to uncover breaches.
She also encourages management to set in place customer-care programmes and follow them through with staff so they understand good customer relations. Staff like working for company where they feel the customer is treated well, she says.
“If you do get complaint, deal with it quickly and fairly. If you reject the complaint, make it clear why.”
Companies should have strategy on how they want to grow the business. “At the expense of your customers and for short-term gain? No.”
She cites the change in public perception of British Airways after new management came in following privatisation and implemented customer-friendly service. “BA used to have terrible reputation and people were always complaining about the poor service from cabin staff. Then it jumped to become the world’s favourite airline. Of course, it’s slipped back bit since.”
Which is why companies must continue to review codes and practices, she says. “If you want to protect your reputation you must be continually vigilant.”
The Institute of Business Ethics (IBE) surveyed major companies which have had ethics codes in place for at least five years. The result was research paper called Does business ethics pay? Ethical and financial performance, which claimed there is good evidence that large companies with codes of ethics:
• are consistently more admired by their peers;
• are rated higher than those without codes on their ability to reduce non-financial risks;
• perform better financially than those that do not have codes.
Ethical companies showed far more stable price/earnings ratios than companies without codes, the survey showed.
The IBE approach is that it is better to “include and influence” rather than to “exclude and criticise”. Their own membership and business was growing prior to the recession – now it is booming, not least because of the behaviour uncovered at companies like Enron and through the Madoff “Ponzi” schemes.
There is increasing legislative pressure in most countries, she says, as well as more inquisitive business media and more active shareholder base. All these now spotlight the shadier dealings and the private lives of chief executives and directors. We are entering new era in company compliance, says Foster Back.
The United Kingdom has passed Bribery Act, which comes into force in April 2012 and carries 10-year jail term for those in authority in British companies which engage in corruption in the UK or overseas. The companies can be fined and after conviction are banned from bidding for European Union contracts.
The recession brought to light lot of bad behaviour, Foster Back says. “There is always temptation when you are up against it to find ways to cut corners just to get the job done. It is very risky approach and very short-sighted view.”
CEOs should consider code of values or business principles as useful start in establishing clearly that ‘this is the way we do business round here’, she says. She advises three-step test for business leaders before they implement decision.
“First, do I mind anybody else knowing what I’ve decided to do? Does the thought of being ‘found out’ give me butterflies in the stomach? Second, who does my decision affect? Have I thought through the consequences? And third, is it fair?”
Philippa Foster Back comes with an impressive list of credentials.
Starting her career in finance with Citibank, she went on to spend nine years at the Bowater Group where she rose to financial controller, before moving on to the publicly-listed training organisation, DG Gardner Group. After that she moved to Thorn EMI in 1993, where she was group treasurer until 2000.
Since 2001 she has been the director of the IBE, where her role is to raise awareness of the need for and value in maintaining good business practice and ethical behaviour in the marketplace, and guide companies through this process.
She is also on the board of the UK Institute of Directors, is past president of the Association of Corporate Treasurers and was awarded an OBE in 2006 for services to the Ministry of Defence, where she was formerly non-executive director and chaired the Defence Audit Committee.

No secrets
Company leaders these days need to think hard about the examples they set, she says, no matter what the business does.
Does what company managers get up to in their own time matter at all? “If you bring the company into disrepute by your actions, or if you misuse company assets, then you can expect trouble. If someone makes poor decision in their personal life; might they make poor decision in business?”
She says people will ask, what’s this person really like? Can we trust them? If their immoral behaviour is apparently acceptable, how do they expect colleagues to behave? How will customers perceive it?
Concerns over ethical behaviour may be limited to the immediate impact on business confidence. But nothing remains secret for long these days and bad news travels fast in the internet age.
Foster Back says she believes New Zealand’s business law is sound, the new financial advisers code is sound and able to be made more robust if required.
“Nothing broke,” she says, but she warns against complacency. Internally, companies need good mechanisms to pick up bad behaviour.
“Most of the time problems come to light because someone sees something happen and they’re not happy about it. You need process whereby someone who wants to report something can speak up, without thinking they will end up in trouble, be discriminated against in some way or might lose their job.
“So if the boss is part of the problem, they need someone else they can go to and that pathway has to be clear to people. Then it is crucial also that the employee knows how the information they provide will be used, so that they understand the process and know that they have been taken seriously.”
The best way of preventing bribery and corruption is to ensure those most at risk know what not to do, she says. In the UK, these are often countries high on the “Transparency International Bribe Payers Index”.
“You need good internal controls and audits to ensure good behaviour. Some internal auditors need new skill set beyond the legal and financial.”
And the message must be constantly reinforced. M

Kiwi firm first to join IBE

Law firm Kensington Swan is the first New Zealand-based company to subscribe to the Institute of Business Ethics.
The decision was driven by the increasing global focus on business

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