EY Trialogue Sustainability Forum: Is ethical conduct becoming embedded in company culture, or is it still simply a ‘tick-box’/ compliance exercise?

Ethics is more prominent in King IV than in King III. King IV consists of 16 principles, the first three of which are specifically focused on ethics: Ethical leadership (The governing body should lead ethically and effectively), Ethical culture (The governing body should govern the ethics of the organisation in a way that supports the establishment of an ethical culture), and Corporate Citizenship (the governing body should ensure that the organisation is, and is seen to be, a responsible corporate citizen (the ethical responsibilities of organisations)[i].

In practice, having a basis for making these disclosures  would appear to imply that the company/its board will need to set measurable objectives and indicators for organisational ethics and responsible corporate citizenship, and to monitor those indicators to understand progress being made against the objectives (King IV is not prescriptive in this respect).

Panellists

  • Jonathan Le Roux – Senior Manager at EY / President of ACFE SA Chapter 91. Johnathan is a fraud risk management professional with over 24 years’ experience spread across internal audit, operational risk, and fraud risk management. He has predominantly operated in the forensic environment, and has held senior management roles in forensic and risk divisions including Old Mutual and EY.
  • Stephan Bezuidenhout – Group Ethics Officer, Discovery Group. Stephan previously held various Compliance Officer and Legal Advisor roles in Discovery and the Liberty Group. Prior to that, he held senior prosecutor roles at the Department of Justice and Attorney-General, now known as the National Prosecuting Authority. He is a Certified Compliance Practitioner with the Compliance Institute SA, a Certified Ethics Officer with The Ethics Institute, and Co-founder and Executive Board Member of the Ethics Practitioners’ Association.
  • Cynthia Schoeman – Founder and MD of Ethics Monitoring & Management Services. She is a founding director of the Ethics Practitioners Association (EPA) and is a member of the IRBA’s Investigating Committee (The Independent Regulatory Board for Auditors). She has over 15 years’ experience in the field of workplace ethics and governance, and is a published author of Ethics Can: Managing Workplace Ethics (2014), Ethics: Giving a Damn, Making a Difference (2012), and An Employee’s Guide to Workplace Ethics (2011). She lectures on workplace ethics, and is part of the external faculty for Wits University, Wits Business School, the Gordon Institute of Business Science (GIBS), the University of Stellenbosch Business School Executive Development and the University of Cape Town Graduate School of Business.

Discussion

1.     Introduction

According to Potter Stewart, Chief Justice of the U.S. Supreme Court, “Ethics is knowing the difference between what you have the right to do and what is right to do.”  Compliance is a legal requirement and focuses on the actions required to abide by the relevant laws. Ethics, on the other hand, involves a moral judgment of doing what is right – moral behaviour that will be of benefit to the company, its employees, its customers, and other social and environmental elements. As such, it is possible for companies to act unethically, yet still be within the lines of meeting compliance standards.

Stephan explained that many companies believe that by being compliant with relevant legislation, standards, and governance codes, they are ensuring that they are ethical organisations. However, employees often have dissimilar and conflicting ethical standards. As such, it is important for organisations to provide their employees with clear guidance regarding expected ethical conduct.

Cynthia indicated that ethics is not embedded in the majority of organisations, in spite of it being at the heart of sustainable business. Whilst many companies do have some form of ethics management system, this is usually not a proactive regular management process. A proactive ethics management system needs to be integrated and requires significant budget and time to set up – it cannot simply be an ‘add-on’.

Johnathan emphasised the point about a worthwhile ethics management system requiring a significant budget. He observed that prevention is better than cure, and that a breakdown in ethical standards can lead to an investigation costing the organisation millions of Rands. As such, it is far better for an organisation to be proactive and spend a relatively small amount on sound ethics management.

2.     Is the increased emphasis on ethics and ethical leadership through King IV leading a movement towards tangible ethical practises, behaviour, and culture?

While King IV is noteworthy with a strong focus on ethics, its impact on corporates is likely to be slow. It does, however, add to the cumulative body of ethics material, and provides a further driver for business in embed ethical practises. The high number of recent government and corporate scandals in South Africa are providing the primary motivation for companies to improve their ethics management.

The panellists indicated that the King Codes, along with the new Companies Act, have played a major role in formalising and helping boards to create ethics management structures, as well as convincing them to go beyond talking and progress to walking the walk.

Jonathan explained that many of EY’s clients had shown in interest in King IV, however, some are already far along in their ethics management journeys. Other companies are cautious, and are waiting for others to take the lead.

3.     What practical measures can or should be taken to ensure an ethical culture pervades within an organisation?

  • Conduct an organisational ethics risk assessment. Once the current status of ethics risk and behaviour is known, an ethics strategy can be developed to embed ethics in the organisation. Different approaches will be required in different companies, as the ethics culture will vary between organisations.
  • The inclusion of company ethics as a standing item on the Board’s agenda will ensure that it is discussed by top management who have the ability to drive the ethics programme and have an impactful influence on ethical culture.
  • Quantitative ethics measurement will enable organisations to track their performance over time. Tracking ethics awareness is relatively easy through surveys etc., but assessing the level of unethical behaviour is far more difficult.
  • Include ethics in performance targets and KPIs. While the incorporation of ethics into company leadership’s KPIs is a challenge, it is likely to likely to drive ethical behaviour.
  • Whistle-blower hotlines can be affective, however, these tend to work best in companies with high trust cultures. Recent media coverage in South Africa has shown that a number of state capture whistle-blowers have paid a high price for their actions in terms of their careers and reputations – naturally this is a disincentive for individuals contemplating reporting unethical behaviour in their organisations.
  • Continuous communication
    • Include a strong ethics and values component into the organisation’s induction programme. Furthermore, hold periodic refresher ethics training.
    • Utilise multiple communication channels in order to constantly reiterate the message.
    • Should an ethics issue arise, have ethics conversations to engage employees, remind them of the company’s values, and explain what actions are being taken to ensure such risks are mitigated.
  • Value chain – Ethical conduct is important to the organisation, and to its value chain. A comment was made that while production can be outsourced, the organisation’s responsibility cannot. For example, use of child labour may be legal in other countries, but it is not in line with ethical conduct in South Africa.

Large corporates have power and capacity to drive ethics in supply chain. Forum attendees gave examples of how this is done in their own companies:

  • Inclusion of ethics KPIs into funding agreements – if these performance measures are not met, the beneficiary can lose the funding.
  • Inclusion of ethics KPIs into procurement contracts. A sample of suppliers is audited each year as self-disclosed claims are not always factual.

2017-12-07T06:47:04+00:00 December 5th, 2017|Featured, Sustainability, Sustainability Forums|