Why Business Ethics Matter to Your Bottom Line

WHY BUSINESS ETHICS MATTER
TO YOUR BOTTOM LINE
David Mallard
david@values.com.au

© Managing Values www.values.com.au

© Managing Values www.values.com.au

VUCA
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

© Copyright of Managing Values www.values.com.au

Interconnected
Where everything and everyone is interconnected


Interconnected
Where social media is the new public square


Interconnected
Where digitisation has
empowered consumers,
employees and
grassroots activists to
take immediate direct
action


Interconnected
Because in an online world
everything you do privately
and/or within your
organisation can find its way
into the public domain


Strategic Risk
Reputation Risk

© Copyright of Exploring Strategic Risk - December 2013
Managing Values www.values.com.au

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


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 no cost and
without restraint


Business Ethics Context
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 points to greater organisational
transparency & accountability i.e. values rather than
rules
• Many leaders invest in ethics management systems to
protect their people
• Embrace increased transparency as the enabler of
ethical cultures

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 systemic 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

 High integrity companies also high performing (CEB)
 World’s Most Admired Companies deliver highest
shareholder value (Hay)
 Strong link between institutional integrity, employee
engagement and discretionary effort



2011 Australian research of 78
organisations found companies
that focused on culture as well as
financial indicators were 3 times
more profitable


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

Culture - the root cause of business
misconduct
1. Culture as much as
policy and internal
control, establishes
the standards for
acceptable employee
behaviour

The ease with which
misconduct can be
completed

Pressure
The motive or
incentive for
employees to
commit misconduct

3. Cultures of integrity
emphasise strong
business performance
obtained in a
compliant, ethical
manner

2. Disengaged
employees are
better able to
rationalise antisocial
behaviour targeted
against an
organisation

Opportunity

Business
Misconduct

Rationalisation
The ability of
an employee to
justify an intentional
act of business
misconduct


Culture - the root cause of business
misconduct

Pressure and
rationalisation can be
reduced by promoting a
strong sense of ethical
behaviour amongst
employees and creating
a positive work
environment


Top ethical risks - how well are
you managing these?
• Funding concerns enjoying a higher priority than ethical
standards
• Unaligned compensation plans
• Poor management of unacceptable behaviour
• Anti-competitive practices / contract violations
• Harassment / Retaliation
• Health or safety violations
• Insider Trading/stealing
• Substance abuse
• Environmental violations


Build organisational integrity?
 Demonstrate ethical leadership e.g. remuneration that
rewards sustainable practices & culture builders, not just
bottom line results
 Active culture measurement as well as compliance
 Train employees & reinforce with visible action on poor
behaviour
 Design systems to promote high level of trust
 Leading businesses in Asia are increasingly investing in
ethical culture development to mitigate against local
practices


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


1212-6

White Paper

Detailed research in White
Paper written by Managing
Values for the Institute of
Chartered Accountants
Australia.
Disclaimer
This paper represents the opinion of the author(s) and not necessarily those of the Institute of Chartered Accountants in Australia (the Institute) or its members.
The contents are for general information only. They are not intended as professional advice – for that you should consult a Chartered Accountant or other suitably
qualified professional. The Institute expressly disclaims all liability for any loss or damage arising from reliance upon any information in these papers.

1212-6

Thank you!
David Mallard

Why Business Ethics Matters
- to your Bottom Line
Case studies and blogs available on
values website
www.values.com.au

Disclaimer
This paper represents the opinion of the author(s) and not necessarily those of the Institute of Chartered Accountants in Australia (the Institute) or its members.
The contents are for general information only. They are not intended as professional advice – for that you should consult a Chartered Accountant or other suitably
qualified professional. The Institute expressly disclaims all liability for any loss or damage arising from reliance upon any information in these papers.


Why Business Ethics Matter to Your Bottom Line

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