Doing business for good will be good for your business
Monday, June 24, 2019
The idea that a commercial organisation should also be a force for good is gaining ground as adherents find it can boost profitability.
Business ethics – the morals, values and principles that guide a firm – has become increasingly important in recent years. Fairtrade, social responsibility and good governance have all followed from heightened levels of corporate scrutiny.
Take the fallout from the BHS debacle. A former paragon of retail, it once had 180 stores on the high street. Then in 2015, Sir Philip Green sold it for £1 to Dominic Chappell and his firm Retail Acquisitions, offloading £1.3bn in debt that included a pensions deficit of £571m in the process. In 2016, BHS went into administration, which nearly cost Green his knighthood and forced him to pay £363m into the BHS pension scheme.
According to Philippa Foster Back, director of the Institute of Business Ethics (IBE), ethical principles have shot up the corporate agenda in recent times. In her view “there is no escaping current increasing political pressure for exemplary ethical behaviour from our businesses”. She points to the new UK Corporate Governance Code which contains a provision requiring directors to monitor and assess corporate culture and satisfy themselves that behaviour throughout the business is in line with the company’s values.
Corporate scandals, including mis-reporting and poor management practices are a key driver for change for Mel Green, research adviser at the CIPD, a professional body for the HR sector. She says that they “have continued to shine a light on the issue of ethics at work. They can damage an organisation’s reputation, erode wider public trust in business and harm individuals. There is broad recognition that business needs to be conducted in an ethical, transparent way for sustainable long-term success, but there has previously been a lack of clarity about how to go about it.”
Emma Scott, representation manager at Chartered Institute of Procurement & Supply (CIPS), notes that the problem for firms is that news travels quickly, but bad news travels at lightning speed. “Consumers, customers, suppliers and investors vote with their feet when it comes to dealing with businesses that aren’t doing enough or have been exposed for doing the wrong thing.”
On a positive note, there are benefits for organisations operating ethically. Being responsible doesn’t mean that a firm can’t make a profit or cut costs according to Scott. In fact, it’s her view that it can open up opportunities for businesses to increase their market share. She highlights how the recent trends in veganism and reduced use of plastics “has made organisations look at their products and adapt them, or even introduce new products to make them more attractive to a wider market.” She points to Guinness which has stopped using isinglass in its filtration process.
In many cases, demonstrating sound ethical practices is a condition for tendering for contracts with large customers needing to ensure the integrity of their supply chain.
It’s something that the BPIF draws attention to. One of its webpages relating to data storage notes that “ever more common ethical audits required by customers often include questions about the company’s data protection compliance, especially in certain sectors where the information held might be sensitive”.
Green takes a similar line, commenting on the recent focus on corporate governance reform and statutory regulation. She says that “this has led to investors showing more interest in how businesses create long-term value for shareholders, employees and wider society.” Further, she says that “businesses should deliver long-term value for many, not the few.”
Interestingly, Foster Back notes that ethically run companies can outperform their peers financially in the long term. She points to IBE research back in 2003: “This and subsequent research by others continues to show how organisations that take their ethical responsibilities seriously and embed ethical values within the fabric of how they operate, do better financially over the long term.”
But ethics goes beyond cold cash – it’s a people matter too. It’s why Scott points out that it’s important to keep in mind that workers and sub-contractors elsewhere, who sometimes may even be children, are often not protected by legislation, and many suffer criminal conduct and poor pay and conditions, often with little regard for health and safety. “In many instances, workers suffer harassment and abuse and, in extreme circumstances, workers can be in situations of forced or bonded labour. This is not acceptable and should not be tolerated.”
Unethical behaviour is common
Unethical behaviour takes many forms from full-blown illegal activity like fraud to so called ‘pro-organisational unethical behaviour’ where questionable actions are taken because they seemingly benefit an organisation in the short-term. For the latter, Green has seen situations where “an employee might oversell the benefits of a product in order to hit sales target. The short-term impact is financial gain, but down the line the client and employees lose out, trust is eroded, and reputation is damaged.”
She details recent research from the CIPD on the causes and solutions to unethical behaviour: “Individuals, organisations and the issues and challenges people face are all implicated in unethical behaviour. “This means a range of factors, from organisational norms, time pressures, and individual personality traits interact to increase the likelihood of unethical behaviour.” He believes that organisations must understand what happens at all levels of their business to get a better picture of the risks.
Unethical corporate behaviour is common. According to ethicalconsumer.org there are a number of big-name culprits and it lists five major players: Amazon (tax avoidance, environmental reporting, supply chain management), Asda Walmart (corporate responsibility, workers’ rights), Nestlé (irresponsible marketing of baby milk, unsustainable palm oil use), Tesco (alleged fraud, supplier abuse), and Coca-Cola (workers’ rights, falsifying environmental data).
But as Foster Back notes, “history is littered with the casualties of companies who failed to put ethical considerations before profit – most famously Enron, and most recently Carillion.”
As she sees it, often it is not simply one dramatic unethical act – but the cover-up, the toxic corporate culture which perpetuated the unethical behaviour so that it became ‘business as usual’.
The real world
So, moving away from the theory, how does business ethics play out in the real world?
By taking a definition of business ethics as to mean the ‘application of ethical values to business behaviour’ it should be clear that ethics has a direct relationship with how business is done. In Foster Back’s opinion, “business ethics can be seen as being about big news stories of misconduct, corruption, black and white bad behaviour or big issues like human rights, sweatshop labour or climate change... we are all making ethical decisions every day.”
The practical reality means considering what supplier to go with, asking staff to work late, choosing who to employ or fire, whether to bend the rules for a client or take a contract – there’s often a choice. Where the ethical business comes to the fore is how it is applied in times of uncertainty and economic pressure.
But is ‘business ethics’ just another layer of bureaucracy? Something that requires lip service, and nothing set in concrete? For Foster Back the answer depends on how embedded the organisation’s ethical values are: “If your ethical values are just words on a wall, rather than embodied in how you do business, then they are going to be viewed with cynicism.”
Actions do speak louder than words so ethics can’t just be a code, a training programme or a speech given by a member of the board. Business ethics has to be demonstrated by how an organisation treats employees, customers, suppliers and the wider community.
Scott relates this to the recent protests in London by the Extinction Rebellion movement that demonstrates the power of consumer groups which can have a knock-on effect with investors. Not acting ethically, or not in the interest of, say, the environment, can lead to a very public vilification.
Better labelling of everyday products is a case in point. Pret-a-Manger was hauled over the coals over the labelling of their food following several allergy related deaths. A new system was introduced in trial locations in May.
Another example cited by Scott is Marks & Spencer which has recently launched a map to allow consumers to trace products back to the factories where they were produced. “This consumer pressure,” says Scott, “follows incidents such as Rana Plaza (the collapse of a garment factory in Dhaka which killed 1,134 – the factory made clothes for many Western firms) and has put procurement teams in the spotlight to ensure that suppliers and supply chains are much more transparent.”
Creating an ethical organisation is more than an exercise in image management in Green’s view. She says that “business ethics requires all stakeholders to be valued and treated fairly. This includes employees, suppliers, customers and wider society. Making decisions in isolation, or not thinking about impact, makes unethical outcomes more likely.”
Organisations need to weave ethics throughout the business using checks and balances and behaviour nudges.
Writing a code of ethics
How should a company engrain ethics within its operations? First off, procedures, policies and practices need to support employees to be ethical in their behaviour and decisions. For Green, this means aligning policies and practices with ethical behaviour: “This isn’t a simple task, but could start with what behaviour is rewarded, and how individuals are incentivised. Having broad metrics for success and rewarding employees not just on short-term profit is a good place to start. Reward strategies could explicitly call out the importance of unethical behaviour.”
Foster Back echoes this view. She suggests starting by identifying the core values to which the business wishes to be committed and held accountable. She says these might include responsibility, integrity, honesty, respect, trust, openness and fairness. “Communicate them through everything you do, from client brochures to your Facebook page.
“It is important to insist that ethical values underpin the businesses mission statement, strategy and operating plan.”
Next comes the important part: translating those ethical values into guidance for all your employees on how to act responsibly in different circumstances.
Here Foster Back says that “if ethical values are the compass which guides how you do business, then a code of ethics is like a map. It sets out the expectations that the company has for how employees should behave in any given situation, to assist with decision-making.” She offers the example of an employee offered an expensive gift or hospitality in return for a contract. A code of ethics gives them something to check against to see whether that offer is in line with how the company wishes to behave.
But no matter what is included in the document, Green cautions that while a code of ethics can be effective, it will only be so when its actually used in practice. She adds: “It needs be clear, consistent and communicated to employees to have an impact. A code or policy will be of limited value if it’s an ‘empty shell’ and behaviour, reward and company values don’t align with it. For example, if a top performer ‘gets away’ with unethical behaviour because they benefit the bottom line.”
To properly embed ethical behaviour firms must train staff. But training shouldn’t be undertaken in isolation says Scott. She says the process also requires “a top down mandate with an ethical and responsible procurement policy.” Her organisation, for example, requires members to sign up to and upload the code of ethics each year.”
From a print perspective, one of the BPIF’s CPD modules, Understanding the skills, principles and practice of effective management coaching and mentoring, makes numerous references to ethics including understanding the importance of ethical behaviour, ethical issues, and the purpose, principles, ethics, practice of coaching or mentoring to gain stakeholder understanding.
Dealing with breaches
Having policies means that it’s inevitable that infringements will occur. The question is – how should they be dealt with?
For Foster Back, the response should depend on the nature and the seriousness of the mistake: “A good rule of thumb, to encourage an openness in the discussion of honest mistakes, is to investigate the mistake, rather than looking to apportion blame. Why was the mistake made? Can the processes, systems and checks be improved so it doesn’t happen again?”
Should a company maintain a zero-tolerance to unethical behaviour? Foster Back says possibly not: “little in life is black and white – it tends to be fuzzy and grey.” She gives an instance: “You may say you have zero-tolerance on harassment, but find it difficult to fire your most successful sales person who has multiple allegations against them. This is where the true test of ethical values comes in – ‘putting your money where your mouth is’”.
Green makes a further point – that when communicating about ethics, businesses should focus on positive examples and what the organisation stands to gain, rather than what’s to lose: “Whilst businesses should be transparent about any issues, they must strike a balance between transparency and creating a sense that unethical behaviour is not the norm. Businesses need to communicate that ethics is ‘business as usual’ and provide clear guidance on what is and isn’t acceptable. This can help line managers and employees challenge unethical behaviour too.”
“Ultimately,” says Foster Back, “if as an organisation it’s important that everyone should be treated with respect and feel safe in the workplace, and if the firm wants employees to act according to that belief, then it needs to stand by its values, even if it costs in the short term.”
In the 1970s, US economist Milton Friedman famously said that “the social responsibility of business is to increase its profits.” While that still holds true, it’s just as relevant to point out that firms need to have an eye on generating profit in a manner which will elicit public approval. A failure to act properly, to treat everyone fairly will soon get noticed. And from there it’s a downward spiral.
Case study: Bonacia
Ian Walton, chairman of Bonacia, runs a company in which 78% of the managers, 73% of the senior management team and 66% of the directors are female. Overall the firm is 60% female. Walton says it’s not by design but rather an emphasis on “attitude over experience”.
Ethically speaking, he says that there are no gender or race equality issues. However, he reckons that Bonacia may have a high percentage of female staff “as we view them as part of the ‘Bonacia family’ and as such we are very understanding and flexible towards their needs. We have flexible start times and flexibility during school holidays.” Over 80% of requests for formal changes in flexible hours in the past two years have been approved.
When it comes to maternity leave, Walton says “there have been many Bonacia babies in the past eight years” and it is dealt with by department managers with the whole team pulling together and temp staff brought in if needed.
Gender plays no role at the company says Walton, who adds that his workforce includes straight and LGBTQ staff: “We have no problem in employing anyone who wants to do a good job and I think this must filter down. We are not PC and especially at company get-together’s the humour can be pretty blue.”
Interestingly, he says that if a customer shows aversion to any member of our staff i.e., they would rather deal with a man than a woman, show racial or sexual prejudice, then they are no longer a customer – “principle before profit.”
Walton does see ethics, or lack of, as an issue for print. In his opinion after 50 plus years in the trade, “in a male-dominated trade I think the rot is at the top. Too many owners and CEOs with a ‘barrow boy’ view of the world: How can I get on? Who can I screw? How can I pay less and get more?”
His advice to the sector? “Start with a clean slate - drop old values and create new and honest ones.”