Organisations would do well to do good right now as ethics-to-go might give you heartburn. By Tim Watts
As the Sydney Olympics organising committee could testify, neglecting ethical issues in your organisation can have destructive consequences. The uproar in regard to Phil Coles and the allegations of graft and corruption during the 2000 Olympics bidding process have brought into sharp focus the difficulties of establishing and maintaining ethical standards, and the profound effect on an organisation if problems are ignored until a full-blown crisis hits.
Situations in which conflicts arise between moral principles and an organisation’s goals are never comfortable. Some managers follow the rule of thumb, wherein they make decisions as if their actions were to be published on the front page of the following day’s newspaper or made known to their parents. Others tend towards the utilitarian approach in which the costs and benefits of the various options are weighed up to arrive at a solution with the least cost to the smallest number of people. However, trying to compare the costs of abstractions such as the effects on future generations or on company reputation with the more concrete benefits of profit or cost savings is by no means straightforward at the best of times, let alone in a high-pressure situation.
Amanda Sinclair, lecturer in organisational behavior at Melbourne Business School, says: “The approach to ethics in Australian companies is typically crisis-driven.” Sinclair suggests there is an implicit assumption in business circles that ethics are something you either have or don’t have they cannot be imposed or learned. A widely held perception is that admitting that your organisation needs to resolve the matter of ethics is an acknowledgment that its current standards are dubious. Simply avoiding ethical questions, and optimistically assuming that everyone in your organisation is capable of making the right choice when confronted with a delicate ethical dilemma, is increasingly becoming a high-risk approach. Ethical considerations have become an integral part of day-to-day decision-making for managers in most workplaces.
Two developments go a long way to accounting for the increased interest in ethics in management. The first is that advances in information technology have concentrated public attention on the internal operations of companies. Attracta Lagan, director of consulting at the St James Ethics Centre in Sydney, says: “The electronic media and the Internet have shifted the power balance dramatically. There are now many more external stakeholders demanding a say in the activities of businesses. Communities and environmental groups such as Greenpeace are effectively communicating that the way a business runs has effects on society as a whole and they want their concerns dealt with. Unethical conduct can put at risk a company’s social licence to operate.”
Perceived ethical breaches by a company very quickly filter through to consumers and to government policy makers who set the regulatory environment in which business is conducted. How well an organisation deals with stakeholder concerns thus has a direct bottom-line effect. Managing a company’s reputation and the value of its brands goes hand in hand with upholding ethical standards.
The second reason for the new prominence of ethics is that changes in ways of doing business have increased the complexity of relations between organisations and the rest of the world. Widespread privatisation of public-sector enterprises has blurred the line between public good and private profit. Companies such as Telstra now have to fulfil their statutory obligations regarding service reach and quality while meeting the demands of shareholders seeking earnings growth and regular dividends.
The effect on managers in such organisations is an expansion in the number and depth of the judgment criteria for even the most basic daily decisions. Establishing whether profit-making activities are to take priority over public-service activities becomes a daily part of the job.
Another factor boosting the role of ethics consideration is outsourcing, the great 1990s cost-saver. As businesses focus ever more closely on their core value-adding activities, the number of relationships with external suppliers providing previously in-house products and services expands. Most businesses have a greater number of close relationships and alliances with suppliers and partner organisations. Defining what is an in-house activity and exactly who is a customer is a complex process that increases the potential for conflicts of interest and confidentiality breaches.
Relationships in the hierarchies of organisations have changed too. The prevalence of flat management structures, in which decision-making responsibility is devolved, means that a greater percentage of employees are likely to find themselves making judgments with ethical consequences. The old-style, top-down model meant that, when ethical dilemmas arose, they were dealt with primarily in the boardroom and managing director’s office. Now that chief executives are focusing on strategy and delegating the control of daily operations to more junior staff, ethical dilemmas are increasingly of concern right across the organisation.
A wider spread of ethical considerations in an organisation is not necessarily a problem. Many judgments concern principles that are widely accepted and are therefore reasonably straightforward. However, monitoring the quality of ethical decisions must become more rigorous. A single decision-maker erring in judgment can have wide-reaching consequences for the entire organisation. The collapse of Baring Bros in 1997 stemmed from the unethical practices of a single trader, Nick Leeson.
The spread of business activities across the globe also increases the incidence of clashes between different organisational and cultural norms. Ethical practices in one part of the world can be unacceptable elsewhere. Occupational health and safety standards that have been established for decades in developed countries are absent or poorly enforced in many developing countries.
In recent years, the United States sportswear giant Nike has been forced to defend its use of factories in South-East Asia against claims of unfair work practices. The oil company Shell has also been the target of activist campaigns alleging exploitative treatment of workers at its Nigerian drilling and refinery operations. Nike and Shell have tried to defend their positions by arguing that their activities do not contravene laws or violate accepted standards in the countries in question. However, their critics argue that to apply different sets of values in different countries is unethical.
These companies have been forced to consider just how far their ethical responsibilities extend. Does a code of practice intended to govern the treatment of one set of employees extend to cover the treatment of employees at contractors factories? If the government in a particular region is not enforcing regulations on safety or discrimination, is a company ethically obliged to?
It gets more complex when an organisation is dealing with foreign groups that subscribe to values that directly contradict those upheld in its code of practice: perhaps relating to issues such as the bribing of government officials, caring for the environment, or discrimination against women. Is it ethical to demand standards that are not culturally accepted?
Means streets are dead ends
Generalising about exactly why bad ethical choices are made is difficult. Lagan reels off a list of justifications that people commonly make when faced with ethical dilemmas. ” The end justifies the means, If it’s not illegal, it’s OK, It’s not my problem, I can get away with it. Individuals come to the organisation with different frames of reference, different world views. It can’t be assumed that they will have a similar understanding of what a set of values means in this particular workplace.”
Barry Davidow, director of the Melbourne consultancy The Ethics Company, says one of the main sources of complaints about ethics in organisations is inconsistency in ethical standards across different departments or up the hierarchy. “I saw one case where the chief executive issued a complete ban on accepting gifts from suppliers and was then seen on television drinking champagne at a corporate box at the football. It started a small riot.”
Lagan says: “Unhealthy workplace cultures develop when an organisation states that it values a certain kind of behavior, but then allows the reverse to occur. Employees feel cheated by the organisation and the whole enterprise suffers.”
Are core values worthless?
Today a corporation without a mission statement or a code of practice full of pronouncements about “core values” would be a rare beast. Many contain flowery language and read like advertising copy.
In these cases, Lagan questions how effectively the principles are applied in everyday operations. “You can put out a set of values for your organisation involving things such as hard work, risk-taking, attention to detail, and high rewards. But these could equally apply to a bank manager or a bank robber. Once the values are established, the next step is to communicate how they fit into your organisation. An organisation is a system that requires a shared understanding of how the organisation will succeed.”
Prescriptive approaches that link specific behaviors with particular values are liable to get a hostile reception, particularly from employees in positions of responsibility who are accustomed to using their own judgment. Davidow says: “People in the organisation have to accept a set of values as their own, principles with which they identify and that they are confident everyone else around them identifies with too. Imposing a set of values from the outside is unlikely to get acceptance and compliance. In most cases, it is about writing down the unwritten rules of the organisation. These principles are in people’s heads already.”
A common response has been to form an ethics committee with representatives from all levels of the organisation to develop a set of key principles through deliberation. “It is rarely effective,” Davidow says. “These committees tend to self-select, and you end up with lackeys who don’t really challenge or debate the issues.”
No, they’re not
Ethics management experts agree that all members of an organisation need to participate in the establishment and maintenance of codes of ethics. Davidow says: “We find that a series of short discussions or workshops involving the whole workforce, but in small groups, is the best way to develop ownership of an ethics code within an organisation.” He says people need the opportunity to compare their interpretations of specific value statements with those of their colleagues. Abstract notions need to be discussed in practical terms to give people a sense of how the code fits in place in day-to-day operations. Often this can mean rewriting of broad generalised statements to link them to particular workplace activities.
“It is about results in the end; about behaviors and their effects. The people in the organisation are those performing the tasks and building the relationships in question. Giving them the opportunity to fine-tune or reinterpret adds resonance to the values.”
Lagan says: “Learning ethical decision-making is like learning any skill. People first need to see it modelled and explained before they attempt to practice it themselves.” She says discussion groups often find it useful to go through specific situations they have encountered, fleshing out how the values embodied in the code of conduct fit into their working lives.
WMC, one of Australia’s largest mining companies, with 6600 employees, established its code of conduct using workshops in 1993. Corporate communications manager Geoff Kelly says these sessions produced a large number of detailed examples of how to apply the code when confronted with an ethical dilemma. More than 40 of these illustrative examples are now filed on the WMC Web site for employees to refer to.
Kelly says a standing committee with representatives from company operations across Australia and internationally is in place to interpret and update the code. “It has no disciplinary or investigative powers. Employees are encouraged to contact committee members for advice, and do so on a regular basis.” The first large-scale review of the ethics code took place at WMC last year.
According to Davidow, many of his consulting clients find that changes in the way in which they are doing business necessitate full reviews of their codes of conduct every two years. “It has to be a living document,” he says. “And it should ideally be exposed to consistent examination.”
Sinclair believes that there is a danger in reviewing ethical issues too frequently this can alienate people in the organisation. “It is a tricky balance,” she says. “You need to ensure that the principles have currency. But people do get exhausted. Discussions in the abstract are wearying. Research tells us that ethics committees need a limited life cycle to give members a focus. If it is allowed to go on and on, people get cynical about the whole process and it loses impetus.”
The idea of an ethics counsellor, an independent and confidential “sounding board” for ethical questions, appeals to many. The Canadian Government has recently appointed an ethics advisor for ministers and staff in a bid to reinforce its commitment to accountability and standards in office. The Australian Securities Institute, in conjunction with the St James Ethics Centre, also launched an ethics advisory service for its members in the finance and investment industry earlier this year. Lagan says the role of the advisor is one of “ombudsman” for member organisations. “If people feel insecure or uncertain about raising the issues in-house, then we can intervene on their behalf.”
The cost of unethics
Sinclair warns against extending the role of legal advisors into the domain of ethics. “We sometimes see companies legal representatives being brought in as mediators,” she says. “It must be recognised that concerns about liability and compensation will drive law firms thinking on these issues. This is not always the best way to deal with ethical issues.”
The costs of unethical practices in Australian organisations are substantial and varied. According to the St James Ethics Centre, fraud costs the Australian economy in the region of $3.5 billion a year. A recent survey by Morgan and Banks found that 13% of the sick leave taken each year is not genuine, which costs employers about $2.5 billion. The cost of occupation-related deaths and injuries is about $22 billion annually and, according to Industry Commission estimates, a large proportion of this stems from inadequate workplace management.
Lagan says that in the United States two-thirds of the largest 500 corporations have been involved in some form of illegal and unethical behavior in the past 20 years. “All the research shows that the majority of managers still operate out of their personal value systems and that these often go unexamined and unchallenged. It is imperative that companies that seek to have a collective or shared understanding of their codes of ethics support them with ethics training.”
The Body Shop’s Social Audit
Do you really want to know how ethical your organisation is? The Australian division of the British health and beauty products chain The Body Shop has just put its reputation to the ultimate test with what it calls a “social audit”. Spokeswoman Vicki Birkenshaw says that the 36-page report, externally verified by a panel led by academic and social commentator Eva Cox, was commissioned to gauge whether the ethical principles in the company’s mission statement were actually embodied in its daily operations. Environmental reports with scientific verification have been published by The Body Shop since 1996, but this is the first ethical examination.
About 8000 customers, 700 staff and 25 representatives from supplier companies were surveyed on whether they believed that The Body Shop was meeting its stated aims regarding the environment, honesty and fairness, product improvement, and customer and community service.
In almost all of the areas surveyed the company emerges with positive results, more than 80% of respondents reporting that they believed the ethical standards were being followed in practice.
Birkenshaw says the results provide a snapshot of the company today, and they indicate directions for improvement. “It allows us to be confident in our principles. Internally it helps us to improve as an organisation. We found in the employee survey, for example, that there was some confusion over the fairness of certain rates of pay. This is something we now know we have to improve on.”
According to Birkenshaw, The Body Shop intends to conduct a social audit once a year, and it hopes to develop a framework for the process so that other organisations can easily adopt it.
The concept of social auditing has advanced even further in Britain. The accounting and consulting group KPMG has appointed author and Kingston University philosopher David Wheeler to head a new social audit division in its London office, to sit alongside its financial and environmental audit operations.