Would the leader of an ethical global company please stand up

Is there an ethical global company anywhere? Currently we see vast swathes of the corporate world wilfully avoiding paying their proper share of taxes through avoidance schemes, mainly centred around Luxembourg.

tax avoiders

Meanwhile three quarters of the banking industry remains mired in never-ending fines for nefarious practices almost too numerous and complex to count.

So many large manufacturing firms damage our environment by allowing or ignoring harmful anti social practices (child labour, discrimination, bullying) and get away with it.

Given that picture, the rest of us could be forgiven for wondering if there’s an honest multi-national business to be found anywhere.

No wonder international studies show trust in companies and their leaders is dismally low, along with poor levels of motivation and engagement amongst employees.

While vast sums are being poured into the compliance enforcement machine, most employees remain reluctant to highlight ethical abuses and wrong doing. Why should they when whistle-blowers usually end up being fired and the ones that remain can normally kiss their career goodbye?

Deciding what is an ethical global company–measuring ethics–remains hit and miss. There are over 250 global and ethical indices all claiming to rank companies by some kind of ethical behaviour.

There are also the more well-known FTSE4Good Index and the Dow Jones Sustainability Index (DJSI) which offer to guide ethical investments in UK companies.  [1]

Like their musical equivalent though, these top of the pops for ethics are seldom stable. They keep changing and the winners’ names come and go. This reflects both company performance and the relative improvement of others.

For example Vodaphone, the world’s largest mobile phone company sat high on one of the indices for good ethical behaviour. Then it was accused of avoiding paying taxes in the UK and has since been hastily deleted from the index.

In America the World’s most Ethical Companies (WME) Index creates an annual league table, a pop list for measuring ethics. Even to be considered for inclusion a company must complete dozens of detailed pages about its ethical performance.

This year, for example, the most ethical companies in the clothes industry are named as Gap, H&M and Levi Strauss, while the banking winners are Banco do Brasil, National Australian Bank, and the Old National Mutual Bank in the US.

Protestors against StarbucksStarbucks was another of the top WME performers in the retail sector, until like Vodaphone  it too fell foul of a tax dodging scandal.

Ethisphere who run the scheme quietly admitted it would be adjusting its questionnaire yet again to take into account payment of taxes.

Indicators measuring ethics are poor predictors of future performance.  BP for example, sat high in both the FTSE4Good indices and the DJSI (see above) until ignominiously slung out over the Gulf of Mexico oil spill.

dow jones index2If employees place little trust in companies, their managers and specialists place even less reliance on ethical indices. A survey assessing the many rating systems revealed under half (48%) of sustainability professionals considered the DJSI had high credibility and only 34% for FTSE4Good. So much for ethical indices. [2] ftse4good

Part of the problem of measuring ethics, or ethical behaviour revolves around what we might call the Richard Desmond syndrome. Desmond, owner of the Daily Express newspaper in the UK, was interviewed by the Leveson Enquiry into the press and was asked what were the ethics of his company.

He looked puzzled and replied:

Desmond

For him ethics was an entirely personal affair, which the rest of us would call morals. Morals though are not the same as ethics.

In search of precision

Knowing whether a multi-national is ethical is therefore still largely an open question. This is because we lack universal criteria. There are so far no world standards for indices. A company may have a good track record for environmental behaviour for example, while being weak on social and governance criteria.

The two distinct tables below highlight this issue further. One was devised by the Canadian Institute of Chartered Accountants. The other more succinct version comes from a leading expert with years of working in this area.

Table 1
indices1

Source: Canadian CPA, Environmental, Social and Governance (ESG) Issues  in Institutional Investor  Decision Making, 2010

Table 2

indices2

Table 2: Source: Ethical Corporation: Integrating “ESG” issues into global risk, compliance & integrity programmes, Nov 2014

These two approaches vary most in the area of governance. This partly reflects who the indices are for.

While the Canadian groupings are mainly aimed at institutional investors wanting to direct funds towards ethically-minded companies—that is social investing, the second groupings are about integrating environmental and social issues more systematically into companies’ risk and compliance programmes.

Despite the detailed financial reporting big corporations are expected to provide there is therefore still no transparent system allowing us to judge how ethical they are.

Yet increasingly society is demanding better business behaviour. Expectations are rising that companies should be able to show their ethicality. But there are virtually no credible comparative data for each multi national showing it’s impact on people and the planet.

We are stuck with mainly qualitative ways of assessing ethical performance. For instance, the deputy director of a global cosmetics firm insists on meeting all newly appointed managers to talk them through the firm’s ethical approach. He also visits the company’s many outposts to personally check on their ethical performance. This kind of “walk the talk” is more convincing than half a dozen indices.

Board room wake up call

For companies wanting to take ethical performance seriously, the starting point will always be with the CEO and the Board. While the former gives leadership and must be responsible for setting the tone, the latter needs to focus on making sure ethics are both on its agenda regularly and there are systematic compliance and ethical assessments which it receives and reviews.

These assessments are akin to the indices already mentioned–except they’re tailored for the specific company and its particular markets. They are often non financial and intangible dealing with hard to measure aspects such as integrity, reputation, and corporate citizenship.

Asking good questions about these though is not enough. Boards must get to grips with the ethics programme–this includes discovering how the company rates against its competitors and within its industry.

Given the present weakness of the international measures, the present indices remain more a starting point than a destination.

 

D. Johnson, Ethical Indices: How do you measure ethics, Weekly Ethical Corp Update, 

October 30 2014

2 See source No 1 above

 

 

 

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