Sheena Carmichael bottom line Business

Sheena Carmichael

Businessethics: the newbottom line

Sheena Version 2 1/5/03 12:36 pm Page 3

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Foreword by Sir Adrian Cadbury 7

Introduction 11

What is business ethics? 15

The benefits of being ethical 20

Putting business ethics into practice 23

Values, openness and probity 31

The American experience 36

Policy priorities for the UK 48

Government’s role 55

Notes 59

Appendix: the European experience 61

5

Contents


This page is covered by the Demos open access licence. Some rights reserved. Full details of licence conditions are available at www.demos.co.uk/openaccess

6

Acknowledgments

Demos and the author would like to thank the sponsorswhose generosity made this paper possible. They areBritish Telecom, C&A, Coopers & Lybrand, NationalWestminster Bank and MSF. The author also gratefullyrecognises the assistance she received from Celia Wells ofCardiff Law School, from her colleagues on the executiveof the European Business Ethics Network (EBEN), andfrom the following people in the United States, who gaveso freely of their time and ideas: Dr W. Michael Hoffman,of Bentley College, Gary Edwards of the Ethics ResourceCenter, William T. Redgate, Vice President – BusinessPractices, The Dun and Bradstreet Corporation, HarveyPitt of Frank, Field, Harris, Shriver & Jacobson, WinSwenson of the Federal Sentencing Commission, RichardFerlauto of the Center for Policy Alternatives, WalterJackson, former Director of the Office of GovernmentEthics, Marilyn L. Glynn of the Office of GovernmentEthics, John Buckley and Vic Pompa of Digital, GraydonWood of Nynex, and Pat Rodgers of Hughes.



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Foreword

This is a timely paper. It not only makes the case for thedrawing up of codes of conduct but also providespractical guidance on how to make them even moreeffective.

The Committee which I chaired solely concerned thefinancial aspects of corporate governance and notcorporate governance as a whole. Yet even within thatmore limited context, we wrote in our report – “We regardit as good practice for boards of directors to draw up codesof ethics or statements of business practice and to publishthem both internally and externally.” Most people want toknow what is expected of them at work and equally wishto be associated with enterprises whose standards meettheir own.

Why, however, should it be seen as necessary to put inwriting what was once – rightly or wrongly – taken forgranted? As Sheena Carmichael points out, businessconduct in the past was to a great extent governed on aclub basis. In the financial services sector in particular,firms were expected to know the club rules and to ensurethat they were enforced. Transgression of the rules waslikely to involve expulsion from the club and the loss ofbusiness that went with it.



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Fore

word The club approach was effective in setting limits to

acceptable behaviour, but its drawback was that the clubdrew up its rules primarily with the interests of itsmembers in mind. It used, for example, to be consideredacceptable to rig the market for the new issues to givenewly-f loated enterprises a f lying start. Club membersnever paid the artificially high price for these stocks, thatfell on innocent outsiders. The argument of the insiders –and they were that in every sense – was that cheating ahandful of unwary outsiders was an acceptable trade-offfor an easily tapped capital market. They also used thatstill familiar justification, “everyone does it.”

Something of the club approach lingers on in thereluctance, referred to by Sheena Carmichael, to acceptthat theft is theft, whether it is stealing from a poor boxor picking the pockets of uninformed investors. Themeaningless phrase “victimless crime” to describe insidertrading is an example of the attempt to draw a distinctionbetween one form of theft and another.

Whatever their limitations, club rules provided adegree of assurance and the sanction of expulsion wasswifter and more certain than the slow arm of the law.For a club to function as a setter of standards, however, itsmembers have to know their fellow members and theyhave to share or accept common values.

The fundamental changes which broke the clubapproach were that firms grew rapidly in size, so that thepersonal inf luence of those leading them was weakened,competition became more severe with pay increasinglytied to performance and the business framework becameinternational, so that there was no longer a single,generally accepted source of moral authority. Firms hadto find their way in what the author describes as a“culturally f luid environment.”

The consequence of these changes, to which must beadded continuing technological change and changingbusiness structures, has been that the unwritten rules –“the way we do things here” – no longer hold. They werepassed on by those with longer service to new entrants.



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Fore

word The steady state on which this approach depends is of the

past.Thus the written codes of conduct have an importance

now which they never had before and in an internationalbusiness they have to be relevant and applicable acrossthe world. Their relevance can only be achieved if those towhom they are addressed have been party to theircompilation, They will only be effective if those at thetop are seen to abide by them and if they are reinforcedby the company’s reward system.

Wide consultation and debate is important in drawingup codes, not only to ensure ownership but also to ensureagreement as to what they mean in practice, especiallyacross national boundaries. It will be normal for codes,for example, to debar the offering or receiving of bribes.But when does a gift become a bribe? Within my formercompany, I suggested two “culture free” rules of thumb inanswer to that question, one which had been regularlyraised in my discussions round the world on standards ofbehaviour.

First, all payments must be on the face of the invoice;in other words they must go through the books, howeverunusual they may appear to head office or the auditors.Second, gifts can be given and accepted, provided thattheir being written up in the company newspaper wouldcause embarrassment neither to the giver nor thereceiver.

The principle behind these rules is that openness andethics go together. What is out in the open may notalways be ethical, but what is concealed is almost certainnot to be. Disclosure enables decisions to be debated andquestioned and codes can be refined in their light – codesshould not be set in stone. One of the planks on whichour Committee’s Code of Best Practice was based was theneed for a proper degree of disclosure.

In governance terms, disclosure ensures that thosewith rights and responsibilities towards companies havethe information which they need to exercise them and Iwould argue that openness is the basis of public



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word confidence in the corporate system. In addition, Sheena

Carmichael argues persuasively that openness within acompany is the surest insurance against unforeseen – bythose at the top – disasters.

There is a final reason why I believe codes of goodbusiness conduct have an importance today which theydid not have in the steadier state, more hierarchicalcompany of the past. It is now widely accepted thatbusiness organisations need to be freer in form, with theindividuals and teams having the authority to get on withtheir tasks without reference back. At the same time,companies are buying in services which they oncecontrolled in-house and are forming alliances withpartners overseas from different backgrounds.

Trust, therefore, has to take over from control. Trustin turn has to be based on a shared understanding of thebasis of business conduct. This shared understanding is asnecessary for employees on the same site, if they are touse their initiative and drive to the full, as it is for goodworking relationships between partners in differentcountries. In an internationally competitive world thatunderstanding can only be reached if we make theconsiderable effort to set down in writing – and reviewregularly – the rules by which we, and all those withwhom we work, do business.

Sir Adrian CadburyChairman of the Cadbury Committee on the Financial Aspects ofCorporate Governance



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Introduction

Ethics used to be a rare word in British public life. Butrecent years have brought a rising tide of concern aboutstandards in public life and business; concerns which are,above all, about ethics. This report aims to contribute tothe debate by showing how formal ethical processes canbe brought into organisations to replace the unwrittencontracts and assumptions that may have worked in thepast, but which no longer hold good.

It suggests alternatives to the still prevalent view thatthe personal integrity of business leaders (or ministers) issufficient to guarantee ethically justifiable decisions.Instead, it sets out concrete steps which can be taken tointroduce processes which encourage ethical behaviour inorganisations, drawing in particular on the experience ofthe USA, where both private and public sector use formalethical processes as part of their everyday operations.

Why should an organisation try to be ethical? Forsome, intrinsic reasons are sufficient. Doing the rightthing needs no justification. But many in the businessworld. look for harder-nosed arguments as to why theyshould change the ways in which they operate. For suchsceptics there are no unambiguous assessments of thedirect benefits of ethical behaviour, in terms of hard cash.



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Intr

oduct

ion But there are many examples of how ethical behaviour

can feed through to the bottom line, improving relation-ships with customers, employees, shareholders andsuppliers. Moreover there is no shortage of evidence ofthe costs that follow from serious failures of ethical con-trols. In business, costly problems, ranging from share-holder opposition to executive pay to environmentaldisasters, are judged by customers and others in ethicalterms, just as in politics the success of a government isjudged not only in relation to its performance but also inrelation to its integrity. More generally business sufferswhen its legitimacy is in question. At present in the UK,only 15% of the public broadly trusts multinational busi-ness to be honest and fair (compared to 27% who trusttheir daily newspapers, 39% who trust accountants and83% who trust their GP).1 According to MORI, 67% disagreewith the proposition that ‘business generally tries tostrike a balance between profits and the public interest’.

So how should firms regain trust? Many of thenecessary steps are set out during the course of thisreport. But the core argument is that openness is now themost important ethical value. A lack of openness hascaused the downfall of many companies. In all but a veryfew instances, it is necessary to put a formal ethicalprocess in place in order to ensure openness within anorganisation. Unless staff feel free to raise concernswithout fear of reprisal, there is a high probability thatwarnings from front-line staff about potential disasterwill not reach those in a position to act. In this sense, thecollapse of Barings Bank is a classic example of the failureof ethical controls, not just of managerial or financialones. It is invariably the case that before a major disaster– be it the Space Shuttle Challenger, BCCI or Barings –there are people within the organisation who are warningof the problem. Disasters of this magnitude strike rarely,but when they do they can destroy a company. Indeed,even apart from its other benefits, the cost of an ethicalprocess can be seen as disaster insurance, as a crucial partof risk management.



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For Britain these may be particularly difficult lessons tolearn. Most British institutions are relatively closed. TheUK has neither a written constitution nor a Freedom ofInformation Act. Much of our law is case law, shaped bythe judiciary rather than the legislature. Well under halfof UK companies have a written code of business conduct.The civil service, until very recently, has had few formalguidelines for its behaviour. Such regulatory and self-regulatory processes as there are, whether in the City ofLondon, the House of Commons or in businessgenerally,are rarely enforced with vigour.

What lies behind these arrangements is the traditionthat British society runs on an unarticulated consensusabout proper behaviour. Before the twentieth century, theconsensus did not need to stretch to the wholepopulation, as both financial and political power wereconcentrated in the hands of the few. Today, with a farwider source of recruitment, and a more open andmeritocratic society, it is no longer possible to assume – ifit ever was – that everyone has the same view of good andbad, of right and wrong. It is even less possible to assumethat everyone will take the same approach to decision-making in the ethical grey areas.

In the USA and other countries it is assumed that witha diverse population it is necessary to spell out standardsof behaviour and put in place mechanisms for ensuringthat standards are met. Of course such approaches alwaysmeet with resistance: when the Federal SentencingGuidelines which have done so much to affect the ethicalbehaviour of US corporations were first brought in, over200 judges threw them out of court as unconstitutionalbefore the Supreme Court ruled in their favour.

But the importance of US experience is that theAmericans have already worked their way through thedifferent stages of this debate. They have tried the optionof simple codification of the rules – but have found thatby itself, a code of conduct is not enough. Instead, in boththe private and the public sectors, people now talk interms of ethical programmes or processes. Based on



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Intr

oduct

ion countless failures and set-backs, it has become clearer

what works.To British eyes, the full ethical process described here

may seem strained and unnatural. It entails formalisingthings which in the past have been informal. It entailsdevoting management time to issues which may appearperipheral to the core business. But if the intention is toalign and internalise ethical behaviour so that eachindividual,objectively, is playing to the same rules, aperiod of discomfort may be necessary.

No ethical process can guarantee correct behaviour,just as no judicial process can guarantee an absence ofmurder or of armed robbery. But it can improve theodds.The report therefore starts by clarifying the differentissues, such as compliance, corporate governance andcodes of conduct which form part of business ethics. Itgoes on to examine values, as the basis of organisationalethics, and discusses the benefits of being ethical. TheAmerican experience is then described as a useful model.An outline is given of the UK legal and regulatoryframework, prior to a series of recommendations for thekey actors who can achieve change: businessesthemselves, shareholders and, finally, government.

The central argument is that ethics is part of the newbottom line for businesses. They will ignore it at theirperil. Businesses which are seen to be unethical will losecustomers, deter potential employees and encouragegovernments to make life difficult for them. Worse,businesses that cannot be open internally, will inevitablyface unforeseen problems.

This book shows how they can pre-empt such problems– gaining not only an individual competitive advantage,but also restoring the trust of the public on whom theyultimately depend.



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What isbusinessethics?

It is only recently that business ethics has become visible.In the past it was assumed to be part of the shared cultureand understandings of those running business, andtherefore did not need to be made more explicit orstudied. Today however it is treated as a separate branchof ethics, with professors, PhD students, courses andinstitutes.

Yet there is still considerable confusion about thenature and scope of business ethics. The widestdefinitions bring in issues such as the relationshipbetween business and society, business and the politicalprocess, and subject the purpose of business to moralquestioning; for example over the legitimacy ofpromoting cigarettes to the third world where consumersmay be less educated about the risks.

At the other end of the spectrum critics such as ElaineSternberg,2 building on the arguments of MiltonFriedman, prefer a very narrow definition of businessethics. If the only purpose of business is to maximise long-term owner value, then, for example, corporatecommunity involvement becomes not only wrong, butultimately criminal – Sternberg goes as far as to define itas theft.



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The problem with both of these views, however, is theirassumption that questions of business ethics can beanswered theoretically, or in a timeless way.

In practice businesses have no choice but to operate ina more complex ethical environment – an environmentwhich is not only continually changing, but also beyondtheir control. Only rarely can businesses wholly insulatethemselves from the values of their existing and potentialemployees and shareholders,consumers and potentialregulators, particularly if their business involves directcontact with the public, the provision of essential servicesor activity in regulated parts of the economy. Moreoverwhen, according to MORI, only 15% of the public believethat companies, only responsibility is to operatecompetitively, such narrow accounts of ethics can easilymislead business leaders.

The fact that business cannot insulate itself frompublic ethics, any more than it can insulate itself fromthe pressures of the market, renders unhelpful an over-narrow theoretical definition. But it also means that thetraditionalist view of business ethics is unsustainable.When the values of consumers and employees change,and when a shared consensual culture is replaced by amore heterogeneous one, it is no longer possible to relyon implicit or ‘common sense’ understandings.

In what follows I do not try to impose a single view ofhow business ought to behave. There is an extensiveliterature on right conduct which has tried to do justthat. Six years ago Derry and Green3 had alreadyidentified as many as nine approaches to the use ofethical theory in business ethical texts: there are probablyhalf a dozen more today. Nor do I take on the full scope ofethics proposed by authors such as Powers and Vogel4 whowrite that ‘in essence, ethics is concerned with clarifyingwhat constitutes human welfare and the kind of conductnecessary to promote it’, a definition which is almostlimitless in its implications. Nor does it address theinteresting debates over the extent to which individualsor firms should be attributed moral responsibility or



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blameworthiness, as in Goodpaster’s classic article, ‘Is acorporation a moral agent?’5

Instead, the argument is narrower. It is primarily aboutthe tools firms can use to think ethically, and about howthey can apply the same rigour to ethics that they applyto such things as product development and marketing. Itargues that unless there is a broad fit between businessethics and wider perceptions, problems are bound toarise; second that in a more culturally f luid environmentit is essential to formalise and operationalise ethics, justas it is any other important parameter of businessdecisions. A significant part of this entails clarification –defining ethical issues more precisely and specifying withgreater rigour the trade-offs between ethics and otherbusiness interests

These tools need to be sophisticated and also f lexible.For the the scope of business ethics is not only wide, it isalso dynamic. The following table, for example, based on a1987 survey6 of 200 Chief Executive Officers and 100senior executives worldwide, gives the views of businesspeople as to what constitutes an ethical issue.

Issue PercentEmployee conflicts of interest 91%Inappropriate gifts to corporate personnel 91%Sexual harassment 91%Unauthorised payments 85%Affirmative action 84%Employee privacy 84%Environmental issues 82%Employee health screening 79%Conflicts between company’s ethicsand foreign business practice 77%Security of company records 76%Workplace safety 76%Advertising content 74%Product safety standards 74%Corporate contributions 68%Shareholder interests 68%



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s? Issue PercentCorporate due process 65%Whistleblowing 63%Employment at will 62%Disinvestment 59%Government contract issues 59%Financial and cash management procedures 55%Plant/facility closures and downsizing 55%Political action committees 55%Social issues raised by religious organisations 47%Comparable worth 43%Product pricing 42%Executive salaries 37%

In practice the relative weighting of issues ref lects publicopinion. Executive pay would probably come muchhigher today. The other major change has been in thesignificance of environmental ethics which has becomeprobably the most highly developed branch of businessethics, largely in response to a perceived change in publicattitudes and consistent evidence that people useenvironmental criteria to judge whether a business isethical. Today, many companies commissionenvironmental audits and print the results in theirannual report.

In themselves such policies – and indeed any policies tooperationalise ethics – do not solve business dilemmas, somuch as clarify them. Animal testing is a good example:the developing arguments over whether companiesshould refuse to sell products which have ever been testedon animals or which contain some ingredients whichhave been tested on animals, has yet to be resolved. Thesame is true of questions of workplace discriminationwhich can at times gain a high public profile ifcompanies fail to control racial and sexual harassment orinformal discrimination. Many forward-lookingcompanies already have a structure in place to deal withthese issues – a policy on harassment, an equalopportunities officer, channels of complaint, as well as



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mentoring and support groups – situations in which it ispossible for staff to talk informally about discriminationand develop skills to take them through the unseenbarriers. But these too are not conclusive solutions, sincethey themselves generate new debates about thelegitimacy of the new rules. The point, however, is thatthe process of arguing about ethics is not onlyunavoidable but also healthy. It brings dilemmas into theopen and ensures that they are managed internally.



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The benefits ofbeing ethical

Why should businesses bother with ethics? There are twoschools of thought about the benefits of being ethical inbusiness. The first, the deontological, focuses on theintrinsic benefits of doing right. The second, theconsequentialist, is pragmatic, and focuses on the payoffsin business terms of avoiding risk and improvingreputation.

Many of the roots of business ethics lie in theology.From the day the money lenders were thrown out of theTemple, some business people have sought to integratetheir personal beliefs with their business practice. But itis not necessary to have a belief in God, Jehovah, or Allah,for one to wish to live one’s life according to thetranscendental values of probity, fairness, or respect forone’s fellow human beings. For those who hold suchtimeless beliefs the most important benefit ofencouraging ethical business, is simply that it is right. Ifin addition it enables both workers and management tofeel good about themselves, then so much the better.According to this view high principles, high morale andhigh productivity go hand-in-hand.

But in a context of fierce global competition businessesneed practical as well as moral reasons to invest in their



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ethics. One is risk avoidance A good ethics process,operationalised so that all decision-making proceduresand structures support it on a day-to-day basis, will givean organisation the best chance possible of finding outabout potential problems early so that they can be dealtwith before they become a disaster.

There are also market advantages to be gained from anethical reputation. The reputation of a company likeMarks & Spencer for quality and value has not beenachieved overnight. This reputation has been developedover decades by their consistently ethical treatment ofcustomers, staff and suppliers. It takes many years todevelop a good reputation, and to acquire the trust ofconsumers. One single incident of unethical behaviour –or even an accident, unethically handled – can destroythat reputation overnight. High ethical standards,regularly reviewed, will enable companies to hearemployee and customer concerns at an early stage: acompany alert to its changing environment will benefitfrom the opportunity to recreate itself ahead of thedemands of the market and of its stakeholders. Finally, effective ethical processes can improve the qualityof a firm’s relationships with its key stakeholders: notonly shareholders but also government (which mayotherwise impose regulatory restrictions), employees andthe communities in which the business operates.

What is government’s interest in the ethics ofbusiness?Why should governments have an interest in the ethics ofbusiness? Despite the benefits to business from beingseen to be ethical it is obvious that some unethicalbehaviours – lying, fraud, deception and theft –sometimes lead to greater profits than their opposites.What is at issue is how far government can or should goin seeking to align business decisions and what areperceived to be moral virtues and the public good.

Here there is a continuum of perceptions. At differenttimes societies may change their views as to the extent of



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The

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al government’s legitimate role. But three types of issue

stand out:The first is that there is a common interest in a basic

level of integrity in the marketplace. This is not only thecase in relation to international competitiveness and theimage of business abroad, but also in relation to domestictransactions.

Second, predictable levels of ethical behaviour reducecosts of transactions, hedging and insurance.

Third, many types of unethical behaviour impose costson government and taxpayers, as in the case of Maxwell.This common interest becomes apparent at times whenpublic perceptions of business turn hostile. Bad behaviourby a few impacts on all businesses, and can create aclimate for intrusive and damaging political interference.

In some cases well-defined laws and regulations canminimise these kinds of problem. But just as it is moreefficient for a society as a whole to rest on self-disciplinerather than external policing, so in relation to business itis far more efficient to find ways to internalise ethicalprinciples. In what follows I show how this can be done,and the distinct roles of government and business itself.



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Puttingbusiness ethicsinto practice

Despite the legacy of the club mentality, a code of ethicsis already present, and in some respects formalised, inmodern businesses. It takes many different forms, most ofwhich have grown up ad hoc, with few guiding principles.These are some of the main ones.

ComplianceMany financial services companies employ ‘ComplianceOfficers’ to ensure that the company does not breach thelaw in any of the many countries where it may be trading,and that it complies with the many regulations anddirectives imposed by the Bank of England, the EuropeanCommission, or other statutory bodies. Some companiesmay point to their compliance officer as evidence thatthey behave ethically, but all the existence of this persondemonstrates is that they are obeying the written rules oftheir profession. This is, in other words, a necessary butfar from sufficient condition for internalising ethicalprinciples.

Moreover, even this issue is more complex than it atfirst seems. In recent years, a number of companies whichwould consider themselves ethical (such as B&Q, whohave a strong environmental policy and a good track



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ice record in equal opportunities) have regularly f louted the

law, by opening on Sundays. Marks & Spencer, on theother hand, said clearly to customers that their ethicalstance did not permit them to break the law, andconsequently waited until the law had been changedbefore opening their stores on Sundays. Clearly, ‘partial’ethics here provided a temporary competitive advantage,but the long-term benefit to Marks and Spencer may begreater.

Codes of conductThe second main area of existing action is around codesof conduct. Research shows that between one third andone half of major British companies have an ethical code.An Institute of Business Ethics survey of 164 leadingcompanies in 1993 found that one-third have, or aredeveloping, codes of conduct.7 The same year, a study byAshridge Management College showed that 43% ofrespondents (directors of the top 500 companies) had acode of ethics.8

The way in which these codes are drawn up, however,varies widely. They may be developed, tested andmodified over many years, or they may be put together ina few days by a public relations department engaged in adamage limitation exercise. The vast majority come froma ‘top down’ approach. Very few say anything about theways in which the codes are implemented, monitored andenforced – probably because, in most companies, the actof drawing up the code is seen as an end in itself. Osmosisis expected to take care of the rest. When asked, ‘Who isresponsible for implementing the code?’ one in threeBritish companies claims ‘everybody’.... in other words,nobody.9

Writing down values and standards is an essential stepon an organisation’s path to integrating ethical behaviour.The number of organisations whose value system is sostrong that they can be totally confident that unwrittenstandards are being adhered to can probably be countedon the fingers of one hand. Recent events have made it



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clear that the standards of the House of Commons do notfall into this category.

But a code alone does not make an organisationethical. To assess their merit, further questions must beasked about their origins and about monitoring andenforcement procedures. If the latter are lacking, such acode can even be counter-productive, as a 1994 survey ofover 4,000 employees demonstrates.10

Ethics and corporate governanceQuestions of ethics have become bound up with issues ofcorporate governance – how companies are governed, thesystem by which they are directed and controlled. Indeedit is arguable that many of the UK’s problems withbusiness ethics can be traced to the roots of the dominantstructures of corporate governance in the governance ofthe country: Jonathan Charkham’s excellent analysis ofthe effects of the aristocratic settlement, dating back toWilliam I, on the value system which for generations hasrated ‘trade’ as an inferior occupation, points out that theconsequences of these attitudes are still pervasive.11

Corporate governance is currently being scrutinisedmore closely than ever before. The Cadbury committee’srecommendations on such things as the existence of anindependent audit committee, numbers andresponsibilities of non-executive directors, and theseparation of responsibilities between chief executive andchairman, are now institutionalised through the StockExchange requirement that companies issue a statementabout their compliance with Cadbury – and their reasonsfor any failure to comply – as a condition of listing on theStock Exchange.

As yet, however, these measures have not restored apublic perception of business integrity. Too many auditcommittees of non-executives appear to be sociallyhomogeneous and insensitive to perceptions ofremuneration both outside and inside the company.

All of these initiatives are steps in the right direction,and as such are to be welcomed. The line that they follow,



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ice however, is that of regulation, rather than ethical

imperatives. As such, they will require policing as, failingother measures to support them, their aims will not beembedded in the culture. Moreover, until they addressmore fundamental questions, such as theunrepresentative nature of non-executive directors andthe almost complete absence of basic modern personnelprinciples (such as equal opportunities) in the way theseare selected, they will remain a peripheral, rather than acore part of ethical behaviour.

Ethics and corporate social responsibilityThe fourth area of change has been around therelationship between business and the communitieswithin which it operates. Corporate social responsibility,now more commonly termed corporate communityinvolvement, is a high profile activity engaged in by mostof Britain’s leading companies. Business in theCommunity and The Prince’s Trust, with the activesupport of the Prince of Wales, encourage companies togive a proportion of their profits to support education,youth work, crime prevention, the arts, medical researchand a host of other activities. Their motto is that thewealth of the high street depends on the health of theback street; many millions of pounds are given to charityby companies. In some cases this is clearly distinct fromsuch more narrowly commercial activities as thesponsorship of arts or sporting events. But in other casesit is overtly used as a tool for diverting bad coverage.Moreover even where the very best communityinvolvement programmes are in place, involving largenumbers of employees and business units, these may stillleave untouched business ethics in core activities.

Ethics and whistleblowingRecent years have brought a f lurry of activity around therole of whistleblowers. Public Concern at Work, thecharity set up to provide help and advice to potentialwhistleblowers, makes the distinction between ‘raising a



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concern’ – when an employee is worried about an issueand discusses it with other people within theorganisation – and ‘whistleblowing’ – when the employeegoes outside the organisation to seek help or publicity.

The existence of a whistleblower implies a breach ofethical behaviour, whether on the part of theorganisation which has done something unethical or, inrare cases, on the part of the whistleblower, who mayhave improper reasons for publicising some action.

Sometimes the issue is straightforward – over half ofthe cases referred to Public Concern at Work relate toalleged fraud; sometimes the organisation’s behaviourmay put the public at risk; sometimes the whistlebloweris in breach of his own contract, as when someone breaksthe Official Secrets Act to leak documents to the press.But there is invariably a secondary ethical issue, namely,how the organisation deals with the person who has aconcern. Raising a concern can be extremely difficult foran employee. A recent study for the Audit Commission12

found that one person in three in the National HealthService would fear for their job if they were to report asuspicion of fraud.

It has been estimated that, before the ChallengerShuttle disaster, as many as 1200 members of staff atNASA were aware that the ‘O’ rings were likely to blowunder certain circumstances. Yet a closed and hierarchicalorganisational structure can make it impossible for thoseat the top to hear messages which do not fit with whatthey expected to hear. In a recent UK case where asubsidiary of a public company behaved in a way whichthe main board would have condemned, the messagesf lagging up the improper behaviour were simply notheard – because they did not fit with what the mainboard expected to hear. And the collapse of Barings Bankwas clearly foreshadowed by auditors almost one yearbefore the final, sudden plunge into bankruptcy.

The sad reality is that almost all whistleblowers end uplosing their job, however good their motives and howeverpraiseworthy their cause. In the United States,



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ice employment legislation now provides for punitive

damages against companies who sack those who haveblown the whistle in the public interest. In the UK,damages paid by Employment Appeal Tribunals can bederisory, and there is little encouragement for staff withserious public concerns to do the right thing. An ethicalorganisation will ensure that its internal processesencourage staff to raise concerns – safely and internally,and with support if necessary from someone such as aunion official. They will not be penalised – indeed, anintelligent organisation will welcome the opportunity tohear staff ’s concerns. The information paradox is thatpower within an organisation often resides with thosewho lack information, and information resides with thosewho lack power. An ethical process can bring the twotogether.

Other domains where ethics are put intooperationEvery type of organisation of work entails some ethicalprinciples and judgements. None is ever wholly insulated.While business ethics is relatively new as a formalisedconcern, primarily, as we have seen, because of decliningcultural homogeneity, there are much older traditions ofethical thinking in the professions and the public sector.

Professional ethicsLawyers, accountants and doctors have long had theirown codes of professional ethics. These codes invariablymention integrity, and put duty to the patient or clientabove everything else (including, some would argue,other virtues such as fairness). But they do not solve allethical problems. For example, when a nursing sisterrecently administered pain-killing drugs to a patient,following the promise of a doctor that he would authorisethis soon after, it was she who lost her job. The doctorwho forgot to sign the authorisation suffered no suchpenalty. If a lawyer does not obtain the best deal for aclient, because he has been careless rather than negligent



29

with the case, the client will normally be advised that thecost of suing the lawyer will far outweigh the additionalsettlement they can get. Neither is obviously ethical.

Codes can provide protection for professionals whowish to blow the whistle – nurses, for example, often feelthat their code will support them in speaking out aboutpatient care. But there is often a feeling that, as theseprofessionals are judged by their peers, the interests oftheir patients and clients lose out. Doctors who are struckoff the register, for example, are often permitted topractice again within a timeframe which surprises thosewho make comparisons with a criminal penalty for asimilar offense.

The secrecy with which their enforcement is shroudedlessens the moral validity of professional ethics codes. Sodoes the fact that their customers – their clients andpatients – are excluded from the process. There are manylessons which can be drawn from them, and their longhistory; but if they are to be accepted as truly ethical,they need to open those closed doors to share theirbenefits with the rest of the world, and allow theircustomers to inf luence the development and enforcementof the codes.

Public sector ethicsEverything that has been said so far about companies canequally apply to the public sector.

Government departments, local authorities, hospitalsand schools are increasingly similar in form to businesses,even though their primary goals are different. Theimportation of a business culture has in many casesexacerbated confusion about how to behave. Civilservants – many of whom knew few business people andlittle about how business operates – were suddenly told tobehave like business people, with little support andtraining as to what that meant. Some assumed thatbusiness was less ethical than the public sector, and thatthey were being freed to behave less ethically than before.In one major privatised industry, there was a significant



30

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ice jump in small thefts and frauds in the first couple of

years after privatisation.Accountability has also taken centre stage in public

discussions of public sector ethics. The rise of a newgeneration of appointed quangos, particularly in health,has raised important questions about precisely how thosesitting on boards should behave.



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Values,openness andprobity

So far I have set out the various ways in which ethicalissues are currently operationalised in businesses, and inparallel fields of the professions and public sector. Butadding these together they do not constitute an adequateethical framework: a clear set of rules and a clear ethos toguide behaviour and decisions. Indeed the danger is thata accumulation of different apparently ethical elementscould actually make behaviour less coherent.

To operationalise ethics more effectively, so as to bringbusiness behaviour more closely into line with the valuesof customers, employees and shareholders (who are inpractice the majority of the population through pensionsand life assurance), a more fundamental approach isneeded, which defines the value system of theorganisation as the basis for its ethical stance.

By this I do not mean the endless references to‘customer care’, ‘profitability’, ‘being a good corporatecitizen’ or the cliched commitment that ‘our employeesare our most valuable resource’. These are at best virtuesrather than values and at worst simply empty rhetoric.

Value systems by contrast combine intrinsic elementsand instrumental ones into a coherent ethos. Intrinsicvalues include probity, trust, fairness, integrity and



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Valu

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robity respect – values which have general acceptance within

our society. Instrumental values encompass openness,accountability and equity, among others, whose virtue isthat they tend to encourage more ethical behaviour.

Clearly every organisation must decide for itself whatits values are to be – preferably with the full engagementof its employees who must live with, and ideallyinternalise, these values. But it is important to recognisethat there are some core elements without which arigorously framed ethical approach will not be complete.

OpennessThe value of openness has already been mentioned. It isthe key instrumental value, because without openness,there is no way of establishing the commitment of anorganisation to its other professed values. Many seniormanagers genuinely believe that they run a highly ethicalorganisation, but the perception of any individual in alarge organisation may be seriously f lawed. Thephenomenon of the ‘ethics gap’ is well known – asignificant difference in the way in which senior andjunior staff view the value system. In part this ref lectsaccess to information. A survey of ethics codes in 1990found that many were restricted in circulation – in otherwords, some junior employees were not considered fit tobe trusted with knowledge of the way the companyexpected its staff to behave – rather remarkably given thenumber of industries in which wide sharing ofinformation is now essential to competitive success.

Employees are not financially illiterate. They allmanage their own household budgets. If all the financialinformation is shared with them – backed, if necessary, byclasses to help them understand cash f low statements andread balance sheets – they won’t put in demands forunrealistic wage increases – unless, of course, they seesenior management taking rewards which are also totallyunjustified by results. When Semco, the Braziliancompany which threw away all the management manualsand started treating its employees as equals in all



33

decision-making processes, decided to be open abouteverybody’s salary, senior executives were wary – and theassumption was that those who were ashamed of theirsalaries felt they weren’t really earning them. But in theevent, the workers came to accept the executive payscheme, and did not try to lower salaries for thoseexecutives who could prove their worth.

Openness is one of the most difficult values to cultivatefor anyone who has grown up within a hierarchicalorganisation or society. Yet openness – a desire embeddedin organisations to listen and respond to even the smallestconcern, and a structure which ensures that anypotentially serious concern reaches the top and is checkedout fast – is the only sure way to avoid corporate tragedy.

ProbityProbity could lay claim to being the core intrinsic value. Itgoes beyond simple honesty. The dictionary definition is‘rectitude’ or ‘uprightness’. It is perhaps the strongest ofthe traditional public sector values. It is also a valueclaimed by many long-established businesses, particularlythose in the financial services sector. It is certainly avalue to which all professions would subscribe.

Cynics will quickly think of all the famous breaches ofprobity which have hit the headlines in the last few years.BCCI, Blue Arrow, Guinness, Maxwell in business and onthe public side, Lambeth, Westminster, Wessex HealthAuthority.

In most of these cases what went wrong was acombination of bad leadership and a culture whichdevalued probity. In other words management, byignoring values, was in practice cultivating the wrongones.

There are many other values which may be relevant.Integrity is the other most frequently chosen value,which should mean much more than honesty: its originalmeaning is ‘wholeness’. Another is respect – both withregard to customers and employees. Clearly eachorganisation must define its own supporting values; in a



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s and p

robity networked company with a relatively f lat structure, for

example, trust may be more important than in a closelymanaged hierarchical one. The key point is that thevalues must fit with corporate reality.

Integrating an ethical approachThe primary task for any organisation is to integrate itsvalues into a coherent whole. This is not as easy as it mayseem. Often the ethical decision-making process producesnot one, but two or three right answers. It can be as muchabout weighing competing rights or wrongs, as aboutcomparing right with wrong.

A coherent process will make sense of issues that canotherwise confuse. But this task of integration also hasanother dimension. Where ethics are concerned, acompany is indivisible. Behaviour in one arm will directlyimpact on public perceptions of all its other activities.

Any organisation which is serious about ethics willregularly review all of its actions to identify whereethical conflicts might arise, and will assess how itswritten materials – statements of purpose, codes ofbehaviour, operational manuals – accord with the,usually, more powerful messages coming through at apractical level. It will make explicit the standards ofbehaviour it requires from its staff, and it will ensure thatprocedures are in place to monitor and enforce thosestandards.

If there is a formal process it will have a professional atits core – an ethics officer whose task it is to facilitateregular, frequent and continuing discussions aboutethical issues, to keep ethics high on the agenda withinthe organisation, to be a point of contact for anyemployee with an ethical concern, and to ensure thatprobity, openness and other appropriate values are ‘lived’on a daily basis.

Ten years ago, in the US, only two companies had sucha person on their staff. Today, as I explain in the nextsection, such posts are commonplace in largeorganisations.



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The advantage to be gained from more rigorous forms ofvalues-based management is evident. A company whichrelates all its decisions back to a base of essential values –values shared with its workforce – will find even the harddecisions easier to implement. For example, ifunprofitable factories and offices have to be closed thereis a huge difference between the sudden imposition ofmanagement dictat and an approach which relates thefactors involved in a decision to core values, treats theindividuals involved with respect, allowing them theopportunity to express their anger and grief, andengaging in open debate with the local community aboutways to mitigate the damage.

Some of the commercial benefits of such behaviour arenow being measured. For example a recent US study byJohnson & Johnson showed that the top 30 ethicalcompanies (and in the United States there are manycompanies which attempt to integrate ethics across theboard) outperformed all other US companies by asignificant factor.13



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The Americanexperience

Both public and private sectors in the United States havebeen addressing ethics in business conduct explicitly forover two decades. There is no longer any reservationabout using the term ‘ethics’ to describe the desiredbehaviour; the British circumlocutions of ‘Standards inPublic Life’ or ‘Corporate Integrity’ are not required. Thereis consensus that if an individual wishes to stand forpublic office, or to be appointed by the President to anexecutive position in the civil service, that the onus is onthem to prove that they are worthy of the trust of thepeople. White collar crime does not have the protectedstatus it is accorded by British courts – and, to someextent, by the British public. The majority of Americanshave no problems with equating major fraud, or healthand safety breaches, with muggings or manslaughter.

US Private SectorAmerican companies lead the world in integratingbusiness ethics processes and programmes into theireveryday management operations. Around 95% ofcompanies have a code of conduct: a growing numberhave an office of ethics and business conduct, andtraining in ethics is now commonplace. What is less



37

widely recognised is that this growth in business ethicshas been largely dictated by government action – thecombined impact of a series of separate pieces oflegislation and government investigations.

To appreciate what follows, it is necessary tounderstand one fundamental difference between US andUK law, namely that the doctrine of vicarious corporateliability is more developed in the US. In effect, it is mucheasier to prosecute a company for wrongdoing: the courtsnot only can, but do, impose substantial fines runninginto many millions of dollars.

The Foreign Corrupt Practices Act of 1977, whichshared its origins with the Watergate scandal, prohibitsUS companies from offering anything of value, directly orindirectly, to a foreign government official or politicalparty representative to obtain or retain business overseas.This required corporations to revamp their internalprocedures, and in many cases they responded bydeveloping codes of conduct. There were immediateprotests that this would make American businessuncompetitive internationally, but the majority ofcorporations continue to trade world-wide with noapparent ill effects.

In the early 1980s, scandals in the defence industry ledthe federal government to establish the PackardCommission to investigate the state of the industry. Itsreport in 1986 favoured self-regulation and prompted themajor defence contractors to endorse a set of principlesknown as the ‘Defense Industry Initiatives on BusinessEthics and Conduct’. The forty-six signatories agreed toadopt and enforce codes of conduct.

However, by July 1988, thirty-nine of these forty-sixsignatories were under federal investigation for fraud andother crimes. Members of Congress began to call formandatory corporate codes. Defense contractorsresponded, yet again, by attempting to strengthen theirself-regulation.

In 1987, the Treadway Commission on fraudulentfinancial reporting suggested that all public companies



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ience should develop and enforce written codes of conduct,

compliance with which should be reviewed annually bythe company’s audit committee.

Following the insider trading scandals of the later1980s (Dennis Levine, Ivan Boesky and Michael Milken,among others), Congress enacted the Insider Trade andSecurities Fraud Enforcement Act (ITSFEA) which, amongother things, made the failure to implement an effectivecode of conduct a potential source of liability undercertain circumstances. The courts were empowered toaward a penalty of three times the profit gained or lossavoided, or $1 million if that were greater.

The most recent – and perhaps final – part of thejigsaw came in the Federal Sentencing Guidelines of 1991.The Federal Sentencing Commission was set up as a newfederal Agency to bring consistency into sentencing. Theprimary focus was on individuals, but the Commissionalso looked at corporate penalties. Their research showedthat the median fine to corporations was only 20% of theloss caused by the offending corporation. Between 1984and 1987 the average fine was $48,000 and 67% of allsuch fines amounted to less than $10,000.

The Commission concluded that sentencing should bedetermined by what kind of company was involved – thatthere should be an attempt to assess the good citizenshipof corporations, perhaps by developing a ‘culpabilityscore’. Since then guidelines have been developed over aperiod of several years, in an extensive dialogue with thebusiness community. The effect of these is to rewardcompanies for good behaviour, rather than to penalisethem for bad behaviour. If a company is convicted of anyoffense, the fines are normally two or three times thedamage caused by the company’s action. But if thecompany can prove that it has an effective ethicsprogramme in place, the fines can be mitigated by asmuch as 95%.

The Guidelines state, ‘The hallmark of an effectiveprogram to prevent and detect violations of law is thatthe organisation exercised due diligence in seeking to



39

prevent and detect criminal conduct by its employees andother agents.’ The concept of due diligence is then laiddown very precisely, in seven steps.

1. The organisation must have established compliancestandards and procedures to be followed by its employeesand other agents that are reasonably capable of reducingthe prospect of criminal conduct (Code of Conduct)

2. Specific individual(s) within high-level personnel ofthe organisation must have been assigned overallresponsibility to ensure compliance with such standardsand procedures. (These are defined as ‘individuals whohave substantial control over the organisation or whohave a substantial role in the making of policy within theorganisation. The term includes a director, an executiveofficer, an individual in charge of a major business orfunctional unit of the organisation, such as sales,administration or finance, and an individual withsubstantial ownership interest) (Top managementresponsibility)

3. The organisation must have used due care not todelegate substantial discretionary authority to individualswhom the organisation knew, or should have knownthrough the exercise of due diligence, had a propensity toengage in illegal activities (Screen personnel)

4. The organisation must have taken steps tocommunicate effectively its standards and procedures toall employees and other agents, eg by requiringparticipation in training programmes or by disseminatingpublications that explain in a practical matter what isrequired (Training and communications)

5. The organisation must have taken reasonable steps toachieve compliance with its standards, eg by utilisingmonitoring and auditing systems reasonably designed todetect criminal conduct by its employees and otheragents, and by having in place and publicising a reportingsystem whereby employees and other agents could reportcriminal conduct by others within the organisationwithout fear of retribution (Monitor: providehotline/advice line: protect whistleblowers)



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ience 6. The standards must have been consistently enforced

through appropriate disciplinary mechanisms, including,as appropriate, discipline of individuals responsible forthe failure to detect an offense. (Action, not words)

7. After an offense has been detected, the organisationmust have taken all reasonable steps to respondappropriately to the offense and to prevent furthersimilar offenses – including any necessary modificationsof the program to prevent and detect violations of law.

This seven-step process is the most comprehensive outlineyet developed of the actions an organisation needs to takeif it is serious about encouraging ethical behaviour. It canbe criticised for being too formal and too legalistic. It iscertainly both. But it has been developed after longexperience of attempts at self-regulation which includedonly some of these features, and which proved f lawed.Those companies which take it most seriously tend to bethe ones which have been exposed to a major breakdownin corporate behaviour. The guidelines leave aconsiderable degree of latitude in interpretation, and avariety of models have been developed. These are a fewexamples.

Example: Dun and BradstreetThe Dun and Bradstreet Corporation was exposed to classaction suits in relation to its selling practices in onedivision of the company in 1989. At the time, like manyothers, the organisation was going through fundamentalchange. “We had made the incorrect assumption thateveryone understood our values”, said ethics vice-president Bill Redgate. “But you can’t make thatassumption!”

The Chairman of this 152-year old corporation with54,000 associates in 70 countries worked personally witha consultant for over a year, talking with focus groups atall levels of the company, to draft a one-page valuesstatement. Senior executives then developed a list ofvalues actions to back this up, which include



41

incorporating the values into performance reviews. Theoffice of Business Practices was established: Redgatedescribes himself as ‘the conscience of the corporation’.

Forty thousand staff were trained within a four-monthperiod. The Chairman then undertook a listeningexercise, in which he came face to face with 4,000associates. Training is repeated annually (with a trainingvideo translated into nine languages); the employeesurvey every eighteen months contains a section onethics; the 0800 number advice line receives over fivehundred calls a year – all dealt with personally byRedgate, who prefers to work alone but in cooperationwith other divisions of the company. There have beensackings of very senior people for breach of the values.

Example: Hughes CorporationThe Hughes Corporation has taken a much more formalapproach, with 13 full time staff in the ethics office and35 part-timers in different parts of the company. Theirliabilities, as a government defence contractor, are ofcourse greater. As a signatory to the Defense IndustryInitiative, their ethics programme dates back to 1986 –and they have learned the hard way that a partialprogramme is not enough.

Their new programme is scrupulous about objectivity,recognising the very difficult personal dilemmas facingthose whose close colleagues are behaving improperly.Their Ethics Officer Pat Rodgers is brutally realistic:“You’re not going to get a feel-good solution to all ethicsproblems.” Their advice lines receive some 4,000 contactsa year from the 80,000 employees. There is an annualtraining requirement in ethics for every employee – andthis training has to be carried out by the line managers.

Rodgers feels there is no such thing as a companyculture in today’s world. All companies are multi-cultural:he does not attempt to change employees’ values oncethey arrive at the workplace – only to ensure that theypractice the company’s values while they are there.



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ience Example: Nynex

This telecoms company has 72,000 people and an ethicsoffice of 11 headed by Graydon Wood. Driven to re-inventits ethics, as were so many others, by a major scandal,their ethics programme is now comprehensive. The adviceline has been running for five years, and in 1994 had3,000 contacts. “People were paranoid about thepossibility of malicious calls at first, says Wood, “but it’sjust not an issue. We’ve maybe had a dozen out of over10,000 calls.”14

Sixty thousand people were trained in the first year,and ongoing ethics training reaches around twentythousand people a year. But the training is backed up by anumber of regular communications, and every otherleadership conference has ethics as the major point onthe agenda.

The process is driven by the Audit Committee ofoutside directors, who receive regular confidential reportsfrom Wood. A comprehensive survey is conducted everytwo years, sent to employee’s homes. A three year ethicsbusiness plan outlines goals, strategies, initiatives andmeasures of success.

Example: Digital Equipment CorporationLike many other companies, Digital promotes a values-based approach. “The compliance approach can get thingsgoing”, says John Buckley, Digital’s ethics officer, ‘but itreaches a limit. You need to go beyond this, tointernalisation.’ Although a defence industry supplier,Digital is one of the relatively few companies which hasput a major ethics process in place without having hadany kind of major disaster.

They have found their values to be a positive assetduring the painful downsizing which they have gonethrough. “Our ethics programme is designed for ethicalpeople,” says Buckley. “The vast majority of our people aregood and well-intentioned – but they get trapped by shortterm business pressures into rationalising things theyshouldn’t be doing.”



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Digital’s two-person ethics office uses calls to the helplineto alert them to potential problems. Vic Pompa, in chargeof training, works closely with a major organisationaldevelopment effort. They attend senior staff meetingsregularly, and general management training includesethics modules. A computer-based training programme isbeing designed to go on the internal network. “Wepartner up with everybody,” says Pompa. An ethicsmodule is also incorporated into the internal auditprogramme.

The Ethics Officer Association, based at Bentley College’sCenter for Business Ethics, now has over two hundredmembers. While ethics is seen as a source of competitiveadvantage for each company, there is little or nocompetition on the subject of ethics. Members of theAssociation share information freely with each other(even when they are within the same industry) andregularly, with permission, borrow from each other’swritten materials and training programmes. Auditing andbenchmarking initiatives are under way.

While many of these ethics officer posts were createdto ensure compliance with legislation, ethics officersinvariably push their remit far beyond compliance.Normally supported by the direct back-up of theChairman or Chief Executive, they are exploring thelimits of these new roles. Recognising that the process isfar from perfect, they nevertheless believe strongly thatthey are on the right track for improving corporatebehaviour.

The Ethics Resource Center, who have worked with over130 major corporations, are clear that compliance alone isnot enough. They find that corporate misconduct doesnot result from ignorance of the law, but from thepressures on employees who rationalise their actionbecause it is in pursuit of desirable, yet seeminglyunattainable, business objectives. They would rewrite theFederal Sentencing Guidelines seven step process asfollows:



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There must be active demonstration of commitment tocorporate standards in the conduct of senior executives,and in the systems they deploy for planning, budgeting,forecasting, revenue recognition and performanceincentives.

Clear standards of conduct applicable to daily responsibilities.Codes of conduct should be written in plain English, andrevelant to key issues faced by employees on a daily basis.

Balanced communication of company standards and businessobjectives.In many companies, ethics and compliance are discussedannually. Meanwhile, performance is examined quarterly,monthly, even daily. This difference in emphasis is notlost on employees. In effective company programmes,managers strive to link discussions of performance toreminders about corporate values and compliance.

Fair enforcement and discipline.The same rules should apply equally to all employees,including top performers and senior executives. Anythingelse breeds cynicism and fosters the belief that policiesare made to be broken.

A safety-valve for employees.The best ethics offices promote ‘help’ lines rather thanhotlines, for employees who don’t know the right thing todo, or who believe their manager expects them to do thewrong thing. In an effective programme, between 5% and8% of the employee population will call the help line eachyear – and 85% of these calls will be seeking advice ratherthan making a complaint.

Proper goal-setting and incentive and reward systems.When earnings decline or market share erodes,companies often increase sales quotas and reduceheadcount without a realistic appraisal of the market or



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of internal capacity. Companies with successfulcompliance efforts understand that unrealistic planning,budgeting and forecasting create an environment wheredecent people may believe that top management expectsthem to violate company standards and the law, ifnecessary, to succeed

An ongoing process.Companies need to understand that ethics is not aprogramme. It is achieved only through continuallyimproving the environment in which decision makingand conduct occur.

US Public SectorThe US public sector has been equally vigorous in tryingto operationalise ethical principles. Following Watergate,the Carter administration established the Office ofGovernment Ethics (OGE) by the Ethics in GovernmentAct of 1978. This Office is responsible for providing‘overall direction of executive branch policies related topreventing conflicts of interest on the part of officers andemployees of any executive agency’. Its remit is confinedto the Executive Branch of the Federal Government – thetwo other branches, the Judiciary and Congress, havetheir own separate processes for ensuring probity.

Prior to this Act, there had been a Code of Conduct.President Lyndon B Johnson in 1965 had set out‘Standards of Conduct’ and directed his civil servicecommission to issue model regulations. Each governmentagency was then required to issue its own regulations thatwere consistent with the model. The OGE found, however,that agency regulations were not always consistent withthe model, or they were written consistently, but wereinterpreted differently by different agencies. A furtherPresident’s Commission on Federal Ethics Law Reform wasconvened in 1989 to evaluate existing ethical rules andpolicies.

The OGE also has responsibility for ensuring throughagency ethics programmes that all executive branch



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ience employees (that is to say, all civil servants) are aware of

the standards of conduct. Each agency (of which there arearound 170, employing approaching five million people)has its own dedicated ethics officer, who is responsible foran initial ethics orientation for all staff and annualtraining for employees in specified positions. They have tofile a written plan for this training with the OGE, whoprovide support in developing training materials andhave a remit to monitor the programmes. The ethicsofficers provide confidential help and advice to any staffwith concerns.

The Fourteen Principles which define standards ofbehaviour were backed up two years later by the FinalRule – a densely printed sixty-page document whichpurports to dot every possible ‘i’ and cross every possible‘t’. The effect of this level of detail, however, is to turnwhat should be a sensible tool to aid effective and honestmanagement into a lawyer’s paradise.

The better answer lies somewhere between theextremes of a code alone, and that of excessive legalisticregulation to accompany a code. The standards of conductwere in place well before Watergate, but at that time therewas no coherence on implementation, and no monitoringof their effectiveness.

In addition to these federal principles, each state hasnow adopted its own ethical principles, and in most statesthere is a similar process of training and availability ofadvice lines for employees.

Used improperly, however, ethics can – and does –become a political football. One leading columnist asked,“Is it pure coincidence that Ron Brown, the widelyrespected Secretary of Commerce who was reportedlyready to chair the president’s re-election efforts, findshimself instead the target of investigations byRepublicans in the House?” She went on to say, “Ethicshas emerged as just one more tool in the perpetualnegative campaign, a handy sword wielded by cynicswho’d rather destroy their opponents than debate them,egged on by an intensely competitive press corps that



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cannot resist a good confrontation. The purpose of highethical standards in government is to have good people ingovernment, not to drive them out or scare them away.”Whether or not she is right about Brown’s probity thepoint is undeniable; any ethical process can be usedmaliciously.



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Policy prioritiesfor the UK

The UK Legal FrameworkWhat lessons should the UK learn from theseexperiences? Any discussion of the way forward forbusiness in the UK must take into account our verydifferent legal and regulatory framework, and the UK’sdistinct approach to the enforcement of laws andregulations.

White collar crime is treated much more leniently ingeneral than ‘ordinary’ crime. Following the Guinnessconvictions in 1990, radio phone-ins posed the question:‘is it right that these men should be transferredimmediately to open prisons? Shouldn’t they be treatedlike ordinary criminals?’ Many listeners felt that thesemen were not ordinary criminals, and justified specialtreatment. Cheating companies was seen as very differentfrom cheating your neighbour, or the small shopkeeperdown the street. Even the Financial Times admitted that‘businessmen operate essentially, on the basis that youshould not tell a lie, but if you can get away with it, youare perfectly entitled to mislead’.15

As Celia Wells points out in her thoughtful andcomprehensive discussion of corporate criminalresponsibility16, the words ‘crime’ and ‘criminal law’



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commonly evoke images of what might be called theserious ‘moral’ offenses, that is, theft, murder, rape orburglary. A different vocabulary is used, however, forcrimes committed by companies or companyrepresentatives. ‘Fraud’ is used for ‘theft’; ‘accident’ for‘violence’ or even ‘unlawful homicide’.

The issue of corporate liability remains both acontroversial and an undeveloped subject. As recently as1989, the Law Commission, commenting on the proposalsfor corporate liability in their draft Criminal Code,‘expressed surprise at the number of points at which, indrafting their suggested clause, they had to fill in gaps inthe law for want of authority.’ Their discussion ofvicarious liability makes it clear there was no intentionthat companies should become generally liable foroffenses committed by an employee.

There is a distinction in law between offenses of strictliability and crimes of intent. For offenses of strictliability, no proof or recklessness or even negligence isrequired: either the crime was committed or it was not.Most regulatory schemes are based on strict liability.Crimes of intent (mens rea) require evidence of intention,knowledge, recklessness or, rarely, negligence.

There has never been any doubt that the members orofficers of a corporation cannot shelter behind thecorporation. They may be successfully prosecuted asindividuals for any criminal acts they may haveperformed or authorised. Statutes do often provide that ifan offense is committed by a company, every director orofficer who is implicated shall be guilty, with the onusoften placed on the director to prove that it wascommitted without his consent and that he exercised duediligence to prevent its commission – though there is nodescription of ‘due diligence’ which in any way parallelsthe very detailed parameters laid down by the US FederalSentencing Commission. For strict liability offenses,vicarious liability for employees has been adopted. Thereal problem, though, is the extent to which the corporatebody itself may be criminally liable.17



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UK The principle of identification, which means that a

corporation can itself be held liable for a criminal offense,became established in English law following three casesin the early 1940s. The introduction of this generalprinciple meant that it was possible to impose criminalliability on a corporation, whether as perpetrator oraccomplice, for virtually any offense, notwithstandingthat mens rea was required.

However, the courts have been very reluctant to acceptthe concept that a company, as such, can be reckless ornegligent. Until 1994, there had been only three prosecu-tions of a company for manslaughter in the history ofEnglish law, none of which resulted in a conviction –although the recent conviction of an outdoor activitycentre and its managing director (who was jailed for threeyears) following the death of some students may herald agrowing awareness of responsibility. The case against P&Oafter the Herald of Free Enterprise disaster, was quashedby the judge. There were no prosecutions following theKing’s Cross fire in which 31 people died. The Director ofPublic Prosecutions had already announced that nocriminal proceedings would be brought following theClapham rail crash when the inquest brought in a verdictof unlawful killing. In a case which went to the Court ofAppeal in 1971, where a lorry with a seriously defectivetyre killed six people in a car crash (the company’smanaging director having allowed the lorry to go outknowing the condition of the tyre) the company wasfined just £750 – though this case was brought under theRoad Traffic Acts rather than as a manslaughter case.18

Health and Safety cases are almost invariablyprosecuted in the magistrates’ courts, where themaximum penalty is £20,000, rather than Crown Courts,where fines are unlimited. White collar fraudsters,convicted of misappropriating millions of pounds, oftenreceive more lenient sentences than teenage burglars.

Regulation, in general, is also less effective than itshould be. The Securities and Exchange Commission inthe United States has powers undreamed of by UK



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regulators – and powers rightly feared by those regulated.In the words of Professor John Kay of London BusinessSchool, in this country ‘The monitored choose themonitors.‘. There is also no clear separation of thepolitical process from the regulatory process: indeed it iscurrently the Secretary of State for Trade and Industrywho can adjudicate on an allegation of insider tradingagainst a senior politician of his own party.

What can the key actors do?With these legal principles as the backdrop, what can themain players do to improve the ethical behaviour andstanding of business?. In this section I set out what canreasonably be expected of the three main actors –business itself, shareholders and government.

What business can doBusiness itself has to take the lead in putting its house inorder. To do that firms need to begin putting into effectcarefully devised procedures for identifying and thenresolving ethical dilemmas.

An ethical auditThe first stage is to undertake an audit of how ethicalproblems are currently dealt with. Tools for ethicalauditing have yet to be fully developed, although a majorstudy on this subject is in progress at the EuropeanInstitute of Business Ethics.19 But the aim of any ethicalaudit is clear: to test the behaviour of the organisationboth against external standards, by benchmarking, andagainst its own declared values.

The external standards against which organisations aremeasured are often subjective – such as whether theyengage in animal testing, or sell alcohol, tobacco orarmaments. Other measures can include the percentageof women, minorities and disabled people employedoverall and at senior levels. Investment in the communityand environmental responsibility are also frequentlymentioned. A number of guides exist which rate



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UK companies against measures such as these, including the

Ethical Consumer in the UK and Rating America’sCorporate Conscience in the US.

Defining valuesWhere the organisation has not yet defined its internalvalues, for example in a code of conduct, those valuesmust be defined. This cannot be contracted out, or left toa Chief Executive. Instead the process must be morewidely owned. A variety of instruments may be used forthis – workshops, small group discussions, individualinterviews or questionnaires. In general, questionnaires orsurveys alone are not effective methods. Case studies,developed by managers in a workshop context, can bevery useful in helping to isolate the key issues.

This type of approach is preferable to its alternative:putting systems into effect and then waiting for the issuesor problems to appear. Some managements have takenpride in the fact that helplines receive few calls. Moreoften than not, what this demonstrates is that few staffare aware of its existence, and have little faith in effectiveaction being taken if they did contact it. But a companywhich receives unsolicited calls from 5% to 8% of its staffannually (the norm quoted above in the US context for aneffective programme) can be sure that it has a goodhandle on the day-to-day ethical issues which emerge.

Systems and structuresThe third step is to implement systems and structures formaking ethical decision-making part of the normalfunctions of a firm. Any models need to be designed tosuit the needs of the company. A straightforward modelmight include analysing the decision to be made underthree different headings – rule ethics, social contractethics, and best result ethics. Rule ethics checks out whatlaws or regulations apply to the decision. Best resultethics identifies the stakeholders, and ensures that alltheir interests are taken into consideration to theappropriate extent – no one would pretend that all



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stakeholders have an equal interest. Social contract ethicsasks the question, ‘If I were sitting at the other side of thetable, would I consider the decision to be a fair one?’ Adecision which has been considered under all of theseheadings is likely to be an ethical one.20

It is crucial that ethical performance should be partand parcel of both contracts of employment and ofregular performance reviews. Measures to evaluate thiscould include the number of times a manager sits downwith their staff with an open ethical agenda (at TexasInstruments, every manager from the CEO downwardstakes time once a month to discuss employees’ ethicalconcerns); their ability to recognise and f lag up difficultethical issues for wider consideration; their ability todiscuss and analyse issues in ethical terms, and train theirstaff in such analysis; the ways they exemplify theorganisation’s values (which are likely to include suchconcepts as fairness, respect and trust) and the ethicalquality of their decision making.

Finally, reward and punishment systems need tosupport the ethical manager. There is no point in givingexcellent performance reviews to the ethical manager ifthe only criterion for promotion is the volume of salesgenerated. Sanctions against unethical behaviour need tobe both effective and visible.

TrainingIt is then possible to move onto the next stage: training ofstaff in ethical reasoning, and how to think about values,before using evaluation and monitoring mechanisms toestablish whether the system is working.

Much of this sounds mechanical. It certainly requires asignificant investment of management time andresources. But the dividend it pays is high: clarity,integrity and insurance against unforeseen disaster.

What shareholders can doThe second set of key players are shareholders. Publicethics are now artificially excluded from decisions about



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UK shares. Fund managers view their role solely in terms of

maximising returns, regardless of the values of those theyrepresent. But there are already signs of this changing.,particularly in North America. The largest fund in theUnited States is the California Public Employees Pension(CalPERS), with investments of nearly $68 billion, whichfiled a shareholder initiative with General Motors torequire on the board a majority of independent directors(the American equivalent of non-executive directors). Thiscame into being in 1991. CalPERS have since used theirpower to file further shareholder initiatives.

Again in the United States, a number of organisationsincluding trades unions, churches, and public sectorpension funds put forward shareholder proposals onsocial policy issues on a regular basis. These cover a widefield, including environmental issues, equal employmentpractices, marketing of alcohol or tobacco, board diversityand community reinvestment. The Investor ResponsibilityResearch Center is tracking over two hundred suchresolutions targeted at leading companies in 1995.21

Some similar pressures have become evident in the UK– partly from small investors opposed to directors salaries,partly from a slow but steady politicisation of pensionfunds, as has happened in the US, and partly from thestill marginal, but growing, weight of overtly ethicalfunds.

Under existing legislation financial advisers arerequired to ask investors to identify all relevant criteriabefore they make recommendations. Only very rarely dothey ask them about their own ethical concerns. A muchmore sophisticated capital market might emerge ifFIMBRA was to require financial advisers to do this, thusdeveloping a more representative set of criteria andprinciples.



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Government’srole

Government can accomplish change in two ways: it canlegislate, and it can set an example. Ethical behaviour isnot a subject suitable for detailed legislation, althoughlack of ethical behaviour can be heavily penalised.

Setting an exampleHow can government set an example? At the momentthere are many internal contradictions betweenministerial words and departmental practices, betweencommitments to openness and pervasive secrecy, andbetween value for money and jobs for the boys.

The starting point for government is self-examination.On top of the various initiatives of the Nolan Committee,the National Audit Office and the Audit Commission arethe logical bodies to carry out this initial investigation –with a commitment from Government that their fullfindings will be published and debated, with no prior‘modifications’ from the department under investigation.The aim should be to clarify problem areas and areas ofethical confusion. Like firms, government then needs todevelop its own codes, its own systems, freephonenumber and so forth. The cornerstone of the code shouldbe the absolute right of staff to raise genuine concerns in



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role the knowledge that any form of retribution is forbidden

and would be severely penalised. The right toindependent representation and support from an outsidesource, such as a union, should also be protected. Again,as in business, ethical considerations need to be madepart of standard job appraisals, training and monitoring.

LegislationSuch moves would help to set a new tone, new norms forhow institutions should behave. But this role in setting anexample is unlikely to be enough. It is sad butdemonstrable that only the experience of disaster or thethreat of sanctions has been effective in producingwidespread attempts within business to conduct theiraffairs in a more ethical fashion. There are a number ofdirect legislative options available.

The United States has been alone for too long in itsstand on bribery. Britain should bring in an equivalent ofthe Foreign Corrupt Practices Act as soon as possible. Thisis particularly important in the light of developments inthe former Soviet Union, where organised crime ismaking bribery a fact of life. If British industry cannotcompete on its merits, it should not be competing. But, asalways, the example must be set from the top, and anygovernment tackling this issue would first have toexamine the ways in which overseas development fundsare allocated.

The laws of limited liability enable those responsiblefor company failure too much latitude in their ability toset up in business again. Too often one company closesdown owing large sums to many individuals, only to openup again the next day offering the same, perhapsfraudulent, service. Company directors can be barredfrom trading again, but this sanction is infrequentlyused.

The Companies Act should be revisited, to makeprosecutions against companies as a corporate entityeasier, and to recognise the principle of aggregation –namely, that while the actions of any one individual in



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themselves may not be culpable, the accumulation of theactions of a number of people may amount torecklessness or negligence. This would also permitsuitable penalties to be imposed, which could of course bemitigated if a company were to prove that it had used duediligence to prevent unethical behaviour

All public limited companies have to submitthemselves to annual audit, and the report of this audit isa public document. A number of companies voluntarilycarry out a regular environment audit, to measure theimpact of their business activities on the environment. Acomprehensive auditing procedure could subsume boththe financial and environmental audit, and also assessthe ethical impact of a company’s behaviour. It may bethat at some time in the future government will lay downa wider definition of the information about publiccompanies which should be available to the public. Wisecompanies will start to think now about this possibility,and ensure that this information is at least available tothem for their internal use.

There are very few British businesses which do not sellsome of their products or services to either central orlocal government. It is entirely reasonable that one of thequalities sought in a supplier should be high standards ofbusiness conduct.

In some instances there might be a case forgovernment to intervene directly in the ethics of abusiness: for example it is already heavily involved inregulating the behaviour of financial services throughthe SIB and self-regulatory bodies (an approach whichcontrasts sharply with the formalised regulatory powersof the SEC in the USA); there are some pressures tobecome involved in banking, and, in particular, torespond to how some classes of customer may bediscriminated against.

In the majority of instances, however, governmentwould not want to bring about changes in businesspractice in its suppliers. Instead its goal should be toensure that standards of business conduct match the



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role standards which government will be requiring in the

public sector. The willingness of a company to open up itsethical processes to external scrutiny could well become afactor in choosing suppliers.

Within the public sector, the initial trainingcommitment will be significant, comparable with that ofa major change management programme. Resistancewithin the public sector to this approach should not beunderestimated: local authorities, too, have been run asprivate fiefdoms. But this programme will have the hugeadvantage of having the sympathy of the whole countryon its side – all taxpayers, after all, are major stakeholdersin these organisations.

ConclusionsThis book has argued that Britain now needs to follow thelead of the USA and formalise ethical processes in boththe public and private sector. It has shown that thealternative will be declining public trust, a proneness todisaster, and internal confusions. Worse, for British firms,it may make it harder to compete effectively in the USAand other international markets.

For many the recommendations set out will seemmechanistic and heavy-handed – they are. But this issolely because experience has shown no other effectiveways of turning around a culture, and beginning theprocess of internalising new values and ways of thinking.

Already a minority of businesses have learned theadvantages of acting ethically. But for the mainstreamthese arguments still feel alien; distant from the real taskof making things and selling goods and services. For themethics only becomes an issue when something goes badlywrong: a faulty product, a dishonestly sold insurancepolicy, an environmental disaster. Yet for all businesses, asfor all institutions, prevention is far better than cure. Andthat is why ethics is now part of the bottom line, part ofthe core tasks of management.



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Notes

1. Henley Centre, Planningfor Social Change, 19942. Elaine Sternberg, JustBusiness, Little Brown,London, 19943. R. Derry and R.M. Green,Ethical ‘Theory in BusinessEthics: a criticalassessment,’ Journal ofBusiness Ethics 8, 19894. C. Powers and D. Vogel,Ethics in the Education ofBusiness Managers, Hastings-on-Hudson: Institute ofSociety, Ethics and the LifeSciences, The HastingsInstitute, 19805. K.E. Goodpaster, ‘TheConcept of CorporateResponsibility’, in T. Regan(ed) Just Business, TempleUniversity Press,Philadelphia, 1983

6. Corporate Ethics: ResearchReport no. 900, TheConference Board, Inc, 19877. Reported in the FinancialTimes, 26 September 19938. The Importance of BeingEthical - Business Ethics and theNon-Executive Director,published by AshridgeManagement ResearchGroup, July 19939. Unpublished researchfrom the Institute ofBusiness Ethics, 199510. Ethics in AmericanBusiness: Policies, Programs andPerceptions. Ethics ResourceCenter, Washington, 199411. Keeping Good Company: astudy of corporate governancein five countries, JonathanCharkham, OUP, 1994,chapter 6



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Note

s 12. Protecting the Public Purse2: ensuring probity in the NHS,Audit Commission, 199413. Unpublished findingspresented in a speech givenby the then Chairman ofJohnson & Johnson, JamesE. Burke, November 16,198314. This point is echoed bymany ethical officers.Where an advice line isproperly publicised andmanaged, as part of agenuine attempt toencourage ethicalbehaviour, the number ofsuch calls is extremelysmall.15. Quoted in SecurityIndustry, September 199016. Celia Wells, Corporationsand Criminal Responsibility,OUP, 199317. Law commissionconsultation paper oninvoluntary manslaughterno 135, 199418. R. vs Robert Miller andSons (1970) 1All. ER 57719. European Institute ofBusiness Ethics, NijenrodeUniversity, The NetherlandsBusiness School20. For a fuller discussionof this approach to decisionmaking, see Carmichaeland Drummond, GoodBusiness – a guide to corporate

responsibility and businessethics, Business Books,London, 198921. Social Issues Reporter,Washington, February 1995



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Appendix: theEuropeanexperience

To a greater or lesser extent, ethics is on the publicagenda in a number of European countries – although anextensive on-line search failed to discover any referencesto ethics and public policy emanating from Brussels. TheEuropean Business Ethics Network (EBEN) was establishedin 1987 to bring together business people and academicsto promote values-based management, and has sincegenerated national networks in the Netherlands,Germany, Spain, Italy and the UK. Ethics is of particularconcern in Eastern Europe, where the dizzy pace ofchange and the growth in organised crime run the risk ofcreating a free-for-all. Some examples of key issues in anumber of European countries follow.

In Germany, as in the UK, it is very difficult toprosecute a company as a corporate entity. In practice,therefore, responsibility for business ethics is delegatedfrom the politicians to the business world. Politicians talka great deal about ethics – especially environmentalethics – but the thrust is to self-regulation. A number ofcompany Chief Executives have a strong personalcommitment to ethics, and there are a number ofindustry initiatives. For example, the Chemical IndustryAssociation encourages members to set up ethical



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dix guidelines – which are mainly environmental, but also

deal with issues such as supplying chemicals to the thirdworld. A growing number of theorists, however, arecalling for a political input, and research has commencedon ways in which an equivalent to the American FederalSentencing Guidelines can be implemented.

Italy has perhaps the greatest incentive for bringingethics into public policy, and heroic efforts are beingmade to overcome the systemic corruption recentlyuncovered in the Italian State. A recent law on publicprocurement, the Legge Quadro, lays down the criteriawhich companies need to meet to obtain governmentcontracts. As well as meeting financial and qualitystandards, the company is also required to qualify ‘from amoral point of view.’ However, Berlusconi suspended thislaw because he said it was too strict, and it is still awaitingapproval. Confindustria (the equivalent of the CBI) isdeveloping a framework for company ethical codes,together with the Ministry of Public Administration(Ministro della Funzione Pubblica). A general ethicalconstitution is also being debated for Cooperatives in theprivate sector. A Charter of Citizen’s Rights is being drawnup, which aims to give the citizen a voice and anopportunity to correct mis-management in publicorganisations. All of this is supported by strong publicpressure, by judges and by political debate.

The Netherlands is a very consensual society, andprefers to operate by self-regulation. Their environmentalstandards are extremely high, and have been achieved bya strategy of covenants over the last five to eight years,negotiated on a voluntary basis between government,business and trades unions. Government officials sign upto these self-regulations. Only 22% of companies have acode of conduct, against the European average of 45%.However, a number of major companies are concernedwith ethics, and organise training for their seniormanagers. The Ministry of Justice is also funding thedevelopment by the European Institute for Business Ethicsof a guide and code of conduct to contribute to crime



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prevention. Closely linked to this is an integrityprogramme for Inland Revenue staff.

France is suffering from a series of high profilescandals and corruption allegations, involving leadingbusinessmen and politicians, both together andseparately. The highly centralised approach to powerresults in the President-Directeur-General of a Frenchcompany having a degree of control over his (rarely her)business greater than that of any UK or US CEO: the callsfor reform of this system are being heard, but change isslow. However, as a direct consequence of the scandals,some companies are appointing business ethics directors(directeur de la deontologie). Corporate communityinvolvement is much less developed than in the UK: at arecent conference in Paris on the role and responsibilitiesof business in shaping cities the debate was not abouthow best to play that role, but whether business had anyrole to play.

Conflict of interest is the main ethical theme in theCzech Republic. There is a current legislative proposal toregulate conflict of interest: some government officialsand politicians are on the boards of private companies.The common understanding is that what is not forbiddenexplicitly by law, is allowed. There is growing pressurefrom the general public, from the political opposition,and some of the smallest parties in the governingcoalition. Companies are beginning to adopt codes ofconduct.



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