Ethics deliver a competitive edge

Jane Arnott – 6 April 2023
Good corporate behaviour matters, so why are so many codes of ethics treated as bottom-drawer material?

Good ethics is a strategy of advantage. The Institute of Directors knows this, as does NZX policy, with the latter tasked over the past 18 months with driving the consultation process related to settings of the NZX corporate governance code, which all issuers are encouraged to follow.

The rebooted code took effect on April 1. It maintains all the existing eight principles but the updates indicate that NZX policy, along with submitters, decided more guidance for issuers was necessary.Applying an ethical lens, Principle 1 (Code of Ethical Behaviour) is now better equipped to lift disclosure and transparency once the new level of specificity is fully grasped.

Principle 1 is now headed “Ethical Standards” and the revised commentary encourages those tasked with preparing a code of ethics to “explain why ethical behaviour is important to an issuer’s purpose”.

Issuers are freshly encouraged to consider the appropriateness of confidential third-party agencies for whistleblowing purposes in a presumed attempt to overcome hesitation and unhelpful reliance on often conflicted senior managers.

The importance of regular employee training against an issuer’s code of ethics is also newly defined as three-yearly or in the year after a code is materially amended.In relation to speaking up, the value of third-party agencies such as the New Zealand-owned and operated Report it Now – a global player in intercepting and protecting companies from misconduct – should already be well understood. Sadly, it is not.

According to the Ethics Conversation, only 30 per cent of the NZX50 provide internal and external speak-up/whistleblowing channels.

Further, the benefits of regular training against a company code of ethics are also poorly understood. But with three-yearly intervals now being specified, the opportunity for many directors to exercise greater accountability will have been enhanced.

While it is fatuous to suggest that a code of ethics plus training equals ethical behaviour, it is naive to assume everyone who joins a company brings a well-aligned ethical roadmap of how to act under pressure and how to interpret or apply stated company values.

Over the years, investors and stakeholders have witnessed the early demise of many CEOs.

Commentators like pallbearers lift the recently departed into the public domain but few identify the extent to which poor ethics coupled with professional ethical risks underpinned the passing.

Probably just as well, because research undertaken by The Ethics Conversation highlights that only 22 per cent of the NZX50 provide clear information about how training against a company code has been undertaken.

Rebooted ethics code
Few of the NZX50 companies approached by The Ethics Conversation responded to the request for information and, of those that did, most failed to recognise that reporting against this recommendation was necessary.

But it is. Further, the rebooted NZX corporate governance code now invites issuers to explain how it sets a tone from the top that is consistent with its code of ethics if training is provided less frequently than the specified three years.

Further Ethics Conversation research identifies, across the past two years, 70 per cent of NZX50 CEOs neither formally nor personally champion their own code of ethics.

Setting the tone from the top isn’t child’s play. And expectations are high. This creates the gnawing reality that many CEOs are neither confident nor connected with actively setting the tone from the top. The concern has lingered for years.

Boards of directors are charged with setting high standards of ethical behaviour and holding management accountable. How this accountability takes hold when the majority of codes are invisibly led and written as if a legal assignment, rather than a motivational guide, is questionable.

Most NZX codes of ethics reflect underinvestment. They exist as a few unappealing, typed pages dense with instructions.

When contrasted with the production piece that typifies an annual report, with all its aesthetically pleasing design, photography and branding, such codes have “bottom drawer” or “appendix C” scrawled all over them. In failing to give the same attention to a code of ethics that is awarded an annual report, suspicion is easily raised.

Prevalence of unethical code
Such suspicion is not unreasonable given the number of surveys that reveal the extent to which ethical company culture is being undermined.

The 2022 EY Global Integrity Report highlighted that more than 50 per cent of respondents said unethical behaviour was often tolerated when senior managers were involved.

The same report identifies that nearly 60 per cent of workers who reported misconduct felt pressure not to report it and almost 50 per cent said they would be concerned if management decisions were scrutinised. And more than 40 per cent had not reported concerns about misconduct despite it affecting them.

To reinforce the concern over ethics is to also identify that the recently reported NZ Herald CEO Pay Survey yielded one aggravating insight.

Of the top 10 CEOs who had experienced the biggest pay increases in 2021-22, only Greg Foran of Air New Zealand elected to personalise and highlight how the airline’s code of ethics contributed to its performance, reputation and trust.

To put this in perspective, in the words of Richard Sexton of PricewaterhouseCoopers’ UK executive board: “Trust is not a soft issue but a genuine and vital asset ... an economic driver and a performance enhancer.”

The right culture matters
Leading an ethical company cultureis an important taskWhile we are at the limit, if not pastit, of what regulation canachieve in deliveringsustainablebusinesses,stakeholders alongwith equity flows are moving towards companies that enable discretionary judgments based on ethical business values.

On that basis, issuers that confidently embed a culture that encourages employees at all levels to make ethically sound decisions bring longer-term value.

We cannot prescribe or dictate how boards or senior leadership teams discharge their responsibilities, but we can make it clear that avoiding or denying ethical engagement is unacceptable.

Despite the opportunity, NZX policy has not jumped in boots-and-all with changes or recommendations that could have provided investors with greater ethical assurance. It is known that submitters who called for robust ethical metrics will need to wait longer before such initiatives are enacted.

Even so, the Institute of Business Ethics in its report titled “Culture Indicators; Understanding Corporate Behaviour”, provides fulsome justification for the benefits of data sets such as regulatory infringements, staff grievances, social media misconduct, health and safety and speak-up/whistleblowing usage.

Such data is outlined as providing useful insight into ethical good governance.

Most, if not all, of this data is already in existence. Currently, however, when it comes to information about regulatory infringements it is the media that provides insight.

Ethical culture is the best antidote to unwise, unfair or criminal bad behaviour.Good ethical leadership enables shared business values such as reliability, trustworthiness and honesty to become ingrained so that rules and policies become secondary to intuitively knowing what to do and when.

Investors are increasingly shifting their money to align with ethical assessments of the capacity for businesses to do good. This sentiment is growing and worldwide capital markets are well aware of the implications.

In applying good ethics as a strategy of advantage, now is a good time for issuers to think about explaining how ethical embedding is secured, how regular training is made possible and how speak-up processes including support are geared towards delivering positive outcomes.

There is ample room for improvement and directors should be setting their sights on at least offering explanations that are deeper than a birdbath and gutsier than a seagull in a storm.

The ethical stake is high and time is running out

.Jane Arnott, MNZM, is director of The Ethics Conversation and conducts ethics training for professional bodies and companies.