Published on February 27, 2014
BUSINESS ETHICS & THE BOTTOM LINE INTERNAL AUDIT’S OPPORTUNITY David Mallard Managing Values values.com.au
The Changing Business Environment A 2012 IBM study of over 1,500 CEOs identified their number one concern in business as ‘Perpetual Whitewater’ characterised by global markets that are: • • • • Volatile Uncertain Complex Ambiguous
Interconnected Where everything and everyone is interconnected ‘Sneeze in London, catch a cold in Melbourne’
Interconnected The new public square - social media
Interconnected Where digitisation has empowered consumers, employees and grassroots activists to take immediate direct action
Interconnected In the online world everything you do privately and/or within your organisation can find its way into the public domain
Connectivity Increases Vulnerability • The internet means more people now see how you do things, how you impact on others and can tell others how you should be held accountable • Stakeholder internet retaliation - anytime for little or no cost and without restraint
Strategic Risk Reputation Risk Exploring Strategic Risk - December 2013
Strategic Risk ‘Reputation risk is now the biggest risk concern, due in large measure to the rise of social media, which enables instantaneous global communications that make it harder for companies to control how they are perceived in the marketplace’. Linking ethical behaviour to reputation makes ethics integral to what drives business success e.g. Starbucks & Google tax minimisation fallout
Business Ethics vs. Individual Morality Who decides what’s ethical ? takes the lead in deciding what is unethical and has defined ethical business as: Corporate Social Responsibility & Sustainability Do systems and behaviours support stated values? Do people understand the difference between personal & organisational values & when one takes priority over the other? Does your business Ethical Code & its values guide decision-making at work?
Decisions made have a direct impact on the 2 primary sources of organisational capital Social capital Financial Capital
Business Ethics Context • Business ethics is a management accountability in US, UK & Europe • Ethical risks are known & regulators demand more than a paper trail • Australia is out of step - business ethics is often seen as a ‘discretionary endeavour’ • IBM’s CEO research highlights a trend to greater organisational transparency & accountability i.e. values rather than rules • Many leaders invest in ethics management systems to protect their people
Business ethics dynamics • Employees consistently report they are working in environments conducive to misconduct • Fall out from GFC led many boards to concentrate on compliance and paper trails at the expense of managing culture • However, compliance inhibits a holistic view of how risk issues emerge • Ethical skill development promotes managerial & personal accountability
Do ethical failures matter? • 2013 Leighton Holdings allegations • 2012 UBS fined $29.7m for system failures • 2012 HSBC paid $1.92billion to settle charges of money laundering • 2012 Barclay’s fined £290m manipulating key interest rates • 2010 BAE Systems pays £400m settle bribery charges • 2010 Rio Tinto employees jailed for bribery in China • 2010 Daimler paid $185m fines bribing foreign government officials • 2008 Siemens paid $1.6billion to settle global corruption case
Discipline of business ethics • Focus on the institutional & contextual dynamics that shape employee behaviour • Demands that leaders move beyond ‘tone’ setting to aim higher - beyond legal minimums • To design institutional practices that encourage & reward ethical behaviour • To establish robust ladders of escalation
Investing in an Ethical Culture A strong positive relationship between business performance and corporate integrity
Investing in an Ethical Culture The Hay Groups WoMAC’s were found to have outperformed average shareholder growth by about a quarter to two-fifths above normal returns Corporate Executive Board research shows that integrity leaders incur only one-eighth the costs of misconduct than competitors, and have 12% lower labour costs because their employees invest more discretionary effort, with shareholder returns 6% higher than the average company
Investing in an Ethical Culture 2011 Australian research of 78 organisations found companies that focused on culture as well as financial performance indicators were 3 times more profitable
Investing in an Ethical Culture The following 4 attributes are statistically proven to both foster a healthy culture and reduce the likelihood of ethical misconduct: 1. 2. 3. 4. A sense of organisational justice Honesty and integrity in relationships Respect and trust for employees Listening carefully to the opinions of others How does your organisation track on these? The research also highlights that organisations with systems and processes to enable risk and compliance information flows but that do not have leaders with the right ethical qualities, will still struggle.
Investing in an Ethical Culture Demonstrate ethical leadership e.g. remuneration that rewards sustainable practices & culture builders, not just revenue, sales etc It is the regular measurement and management of culture that differentiates high-performing organisations from their peers Actively measure your leaders - objective and subjective Educate employees and deliver organisational justice by responding quickly and consistently to unethical practices Leading businesses in Asia are increasingly investing in ethical culture development to mitigate against local practices
Internal Audit’s Role in Building an Ethical Culture • Effective management of business ethics risk requires an organisational strategy that is in tune with wider societal values and the public’s growing expectations of business. • Business Ethics is about risk management effectiveness - its directly in Audit’s sweet spot • Leverage Internal Audit’s unique organisational position to influence the ethic’s conversation: CEO, CRO, Board members • Include an Ethical Risk benchmark review in your Audit coverage – compare your organisation to better practice - sell recommendations in the context of mitigating risk and improving the bottom line. Promote Audit along the value curve • The ethics whitepaper is one reference point to commence
Successful businesses of the future will: • Build organisational integrity as an enabler of business profitability and success • Embrace ethics and transparency as way of flattening hierarchies & engaging employees • Step up to meet employee desire to be part of a business that seeks to enhance society as well as deliver bottom line results • Leverage Internal Audit’s unique position for influencing change
White Paper Detailed research found in White Paper written by Managing Values for the Institute of Chartered Accountants.
More Information www.values.com.au email: firstname.lastname@example.org
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