Large Ethical concerns and Superbrand reputation risk ......2 The study advisory panel 5 3 Managing business ethics – the need and the opportunity 6 4 Executive summary 9 4.1 The

LargeSuperbrandEthical concerns andreputation risk managementA study of leading UK companies

Contents

1 Foreword 3

2 The study advisory panel 5

3 Managing business ethics – the need and the opportunity 6

4 Executive summary 94.1 The story so far 94.2 Influences, impacts and challenges 114.3 Commentary 14

5 Results 165.1 Components of business ethics programmes 165.2 Analysis of individual components 225.3 Influences, impacts and challenges 36

6 Survey process, responses and participant profiles 456.1 Process 456.2 Responses and participant profiles 45

7 Further information 487.1 Arthur Andersen 487.2 London Business School 48

8 Index of charts 50

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This report is correct to the best of our knowledge and belief and at the time of going to press. It is,however, written as a general guide, so it is recommended that specific professional advice is soughtbefore any action is taken. Arthur Andersen is authorised by the Institute of Chartered Accountantsin England and Wales to carry on investment business.©Arthur Andersen. December 1999. All rights reserved

1 Foreword

The need to manage business ethics risk is increasingly recognised in leadingorganisations, not least because of the devastating impact that even isolatedacts of wrongdoing can have on an organisationÕs reputation among itsstakeholders. UK companies differ widely in the depth, breadth andsophistication of their responses to this risk, suggesting a need forknowledge-sharing in this field.

Accordingly, during 1999, Arthur AndersenÕs Ethics and ResponsibleBusiness Practices consulting group, in collaboration with the LondonBusiness School, conducted a survey of FTSE 350 companies and non-quotedcompanies of equivalent size. The study investigated the activities of leadingcompanies in response to business ethics challenges, their perceivedeffectiveness, and trends over time. To ensure that the initiative addressedthe most important business ethics challenges and issues that companies face,we established an advisory panel of corporate leaders, executives withbusiness ethics management responsibilities and ethics experts.

We developed a questionnaire for Company Secretaries. The analysis of the78 responses suggests that most participating companies are actively strivingto manage business ethics and are continuing to develop their approaches.They will be able to use the research findings to benchmark theirprogrammes against comparable companies. However, adoption ofprogrammes to manage business ethics risk is by no means evident in alllarge companies. No doubt, respondents to the survey are likely to be moreactive than most companies, and at or near the leading edge in this emergingfield.

This initiative will hopefully stimulate a new, broad-based, approach to thestudy of how business manages business ethics. In all organisations, a varietyof factors, activities, policy documents and other controls affect their businessethics exposures. Examples are their cultures and shared values, their codesof conduct and their communications with stakeholders. By considering allapproaches, as well as each individually, managers can begin to understandthe relationships among these approaches, their relative merits and their trueeffects. While studies which consider individual components in isolation docontribute to our understanding, their effectiveness can be misinterpreted.This broader perspective should enable businesses to better apply scarceresources to the right approaches, in the right measure, and evolve theirprogrammes faster towards best practice.

We regard this study as exploratory. More research is necessary, particularlyin-depth analyses of the most active companies in this field, comparisonswith companies based in other regions of the world, and studies of therelative merits of different approaches in addressing specific business ethicsrisks, such as those related to product sourcing from developing countries.

Ethical concerns and reputation risk management 3

This study is intended to motivate business practitioners to develop theirexisting programmes towards best practice or initiate programmes wherethey do not already exist. It should also attract the attention of businessleaders. Even integrated programmes are not enough without commitmentfrom top management to follow through with actions that are consistent withvisionary words.

Arthur Andersen and London Business School are grateful to the manycompanies who contributed their data and views to make this study possible,and to all the members of our panel for their contributions to thedevelopment and reporting of this study. As a result of their combinedcontributions, we have been able to produce a report which we hope is bothstimulating and practical.

Philip Randall Professor John QuelchManaging Partner DeanArthur Andersen UK London Business School

4 Ethical concerns and reputation risk management

2 The study advisory panel

Our advisory panel consisted of corporate leaders, executives responsible formanaging business ethics in their organisations, and business ethicsspecialists.

Sidney BrichtoSir John Egan, MEPCDuncan Goodman, GUS PLCMike Green, Lloyds TSB Group PLCLord Haskins, Northern Foods PLCMartin Hayman, Standard Chartered PLCGraham HolbrookJohn Jackson, Hilton Group PLCSir Stanley Kalms, Dixons Group PLCGeorge W. Mallinckrodt, KBE, Schroders PLCTim Melville-Ross, Investors in PeopleRichard Putnam, CGUMalcolm Rawlins, Schroders PLCStephen Rubin, Pentland Group PLCSue Slipman, Camelot Group PLCBob Smith, Rolls-Royce PLCProfessor N. Craig Smith, Georgetown University, USACatherine Springett, National Power PLCDr Keith Taylor, Esso UK PLCDr Elizabeth Vallance, St Georges Healthcare TrustJan Walsh, British Telecommunications PLCProfessor Norman Bowie, London Business SchoolIan Jones, London Business SchoolProfessor John Quelch, London Business SchoolHarish Bhayani, Arthur AndersenRichard Simmons, Arthur AndersenDebra Weiner, Arthur Andersen


3 Managing business ethics Ðthe need and theopportunity

In the context of this study, business ethics can be regarded as that subjectconcerned with how people make decisions, or behave, in organisations. It isconcerned not only with people of bad character, but also with people of goodcharacter and how they can inadvertently cause wrongdoing. A fundamentalaspect of business ethics is that it pervades all parts of organisations.

Managing business ethics is increasingly important because business ethicsrisks, ie the risks associated with inappropriate behaviour or wrongdoing,have grown in number, complexity, likelihood and significance. A significantexposure is reputation risk, as reputation is closely linked to behaviour.

More risks, more complexity

● management delayering and cost cutting in organisations means thatvaluable experience is lost and fewer managers are expected to do more,with less;

● increasing globalisation of operations has created more complexorganisations which operate in diverse cultures and jurisdictions;

● increasing merger and acquisition activity has created more complexorganisations and risks of Ôculture clashÕ in the enlarged organisations;

● increasing rate of change of business activity has increased uncertainty,and made it difficult for employees to Ôkeep upÕ;

● increasing scale of operations as organisations grow mean that evensingle acts of wrongdoing can have far-reaching consequences;

● increasing use of and dependence on new technology and new ways ofworking such as teleworking is reducing opportunities for effectivecommunication among employees and managers; and

● increasing laws and regulation, eg the Public Interest Disclosure Act,Employment Relations Act, Draft Involuntary Homicide Bill (whichdefines a new offence of Corporate Killing), EU Working Time Directive,Human Rights Act and Corporate Governance Guidelines, increasecomplexity and the potential for non-compliance.

Greater likelihood of discovery

● speed of information access and dissemination has increased, due totechnology;


Business ethics is concerned not

only with people of bad character,

but also with people of good

character and how they can

inadvertently cause wrongdoing.

Managing business ethics is

increasingly important because

business ethics risks have grown in

number, complexity, likelihood and

significance.

● access to information has increased, for example through the internet or24 hour news services; and

● scrutiny by stakeholders such as government, non-governmentalorganisations, public and customers has increased, in the wake ofcorporate scandals and as their perceptions of the role and responsibilitiesof business have changed.

Greater costs

● increasing reputation damage in an era of expanding customer choice Ðreputation is an increasingly valuable corporate asset;

● increasing fines and penalties, for example the Competition Act proposalsand environmental legislation; and

● increasing litigation, as organisations attempt to protect their interests inincreasingly complex business environments.

All of these changes have all contributed to making the dynamics of decision-making more complicated than ever, requiring organisations to respond withrobust programmes for guiding employee behaviour. The prize for thosewhich can do so successfully is competitive advantage.

Opportunities

As well as protecting organisations, well managed business ethicsprogrammes can also create positive outcomes such as:

● enhanced reputation of the organisation and its leaders;

● more effective and efficient working practices;

● less firefighting and therefore more focus on strategic operation;

● increased employee loyalty; and

● improved ability to recruit high quality people.

It is with risks and benefits such as these in mind that, as this studydemonstrates, more companies are paying increasing attention to themanagement of business ethics.

Examples of business ethics challenges quoted by participatingcompanies

ÒThe support of the board and senior management is essential. Ethicssuffer when business is bad.Ó

continued overleaf


These changes have all contributed

to making the dynamics of decision-

making more complicated than

ever, requiring organisations to

respond with robust programmes

for guiding employee behaviour.

The prize for those which can do so

successfully is competitive

advantage.

As well as protecting organisations,

well managed business ethics

programmes can also create

positive outcomes.

ÒEngaging every employee/supplier/business partner in understanding(that) how we behave does have an impact on our reputationÓ

ÒImplementation of our business principles in joint ventures and bysuppliers and contractorsÓ

ÒPreparing full regular and legal compliance on a timely basis in periodsof continued and fast changeÓ

ÒAllegations of price fixingÓ

ÒThe business is regulated by authorities who require outstandingcorporate behaviour, particularly in the area of ethicsÓ

ÒThe reputation of the industry can affect the reputation of the companyand this can be hard to changeÓ

ÒMaintaining standards in the face of a fast changing cultural andtechnological environmentÓ

ÒEmployees in kitchens deliberately inserting foreign bodies in foodÓ

ÒMaintaining standards while meeting cost/competitive needsÓ

ÒResponsible drinkingÓ


4 Executive summary

Reputation risk is inextricably linked to business ethics. This report profileshow leading UK companies are managing their business ethics risks.Specifically, the report contains the following:

● benchmarking data;

● information and insight on current practices and trends;

● opinions of executives responsible for business ethics programmes;

● perceived opportunities and challenges for UK companies; and

● illustrative scenarios of the subtleties, complexity and variety of businessethics risks.

4.1 The story so far

The growth of business ethics programmes and their components

The use of business ethics programmes by leading UK companies hasincreased significantly over the last three years. Without exception, allcomponents of business ethics programmes reviewed in this study are morepopular today than they were three years ago, and by very significantamounts. These components are listed below in order of popularity.

● Values/mission statements● Codes of Conduct● Consideration of stakeholdersÕ needs● Periodic declarations/acknowledgements of compliance● Reporting/advice channels (eg hotlines, compliance officer)● Feedback gathering mechanisms (eg surveys, focus groups)● Employees/departments with ethics responsibility● Business ethics training● Inclusion of ethical criteria in reviews of divisions/functions● Inclusion of ethical criteria in employee appraisal/reward systems● Assessment of business ethics activities by external bodies

To illustrate some examples of growth: most companies (86%) launched theirfirst Code of Conduct no more than ten years ago; the use of Codes ofConduct today was reported by four in five companies (78%) compared withthree in five companies (57%) three years ago. Other increases are even moredramatic, though from lower bases; the use of training has more thandoubled to two in five companies (40%) and the use of feedback gatheringmechanisms almost doubled to one in two companies (55%).


The use of business ethics

programmes by leading UK

companies has increased

significantly. Without exception, all

main components of business

ethics programmes are more

popular today than three years ago,

and by very significant amounts.

This significant growth, in an

activity which some still regard as

optional, is all the more remarkable

because it has occurred despite

competition for resources from

other priorities such as the

millennium bug, introduction of the

Euro and ever increasing cost

reduction pressures.

These across-the-board increases

also suggest increasing

sophistication as organisations add

more components; business ethics

management is evolving as

organisations find their feet in this

emerging area.

This significant growth, in an activity which some still regard as optional, isall the more remarkable because it has occurred despite competition forresources from other priorities such as the millennium bug, introduction ofthe Euro and ever increasing cost reduction pressures.

These across-the-board increases also suggest increasing sophistication asorganisations gain experience and confidence in the use of programmes andadd more components. Business ethics management is evolving asorganisations find their feet in this emerging area.

The components in detail

While organisations are increasingly employing more programmecomponents, there remains much scope to make each more effective. Thefollowing examples are illustrative.

● In companies which have Codes of Conduct, these are issued to allemployees in four out of five organisations (80%). In companies whichprovide some form of business ethics training, it is provided to allemployees in only three out of five organisations (61%). By excludingsome employees, organisations lose an opportunity to communicateexpected standards, and risk fostering a divisive Ôthem and usÕ culture. Asdiscussed later, employees in companies which have Codes of Conduct orprovide business ethics training are more likely to be aware of businessethics risks.

In most organisations, few internal stakeholder groups contribute to thedevelopment of Codes of Conduct, or the development and delivery ofbusiness ethics training. Restricted involvement can result in productswhich are out of touch with reality, and create a negative impact as a resultof cynicism. The limited involvement of line management is of particularconcern.

● Almost half of all participants with Codes of Conduct (45%) do not makethem publicly available on request. Such resistance represents two missedopportunities Ð to advertise commitment to minimum standards ofbehaviour, and to reinforce its and its employeesÕ commitment to thosestandards by going public. A few organisations positively market theirCodes of Conduct by publishing them on their web sites.

● The content of most training programmes appears to be restricted tocommunication of standards and resources. The majority of organisationsdo not make use of a variety of additional valuable content:

Ð Practical application of standards in realistic situations;

Ð Sharing of participant experiences;

Ð Teaching decision-making models and frameworks (ie communicating thefactors which influence peoplesÕ actions or behaviour); and

Ð Understanding the causes of poor decision-making or unethical conduct


There remains much scope to make

individual components of

programmes more effective.

The content of most training

programmes appears to be

restricted to communications of

standards and resources.

Significant numbers of companies

which have Codes of Conduct or

business ethics training do not

provide them to all employees.

Almost half of all participants with

Codes of Conduct do not make

them publicly available on request,

whereas a few positively market

them by publication on their web

sites.

By expanding content to include these areas, training can be made morerelevant and improve learning and competency. More robust programmesincorporating such elements help also to emphasise an organisationÕscommitment.

● Stakeholder consultation has increased over the last three years, howeveractivity appears to have reached a plateau. Some level of awareness ofstakeholder issues is necessary; by definition all stakeholders are affectedby or affect an organisationÕs activities. The relevant decisions are how faran organisation goes to monitor and address stakeholder impact, andhow it does these.

There appears to remain scope for more systematic assessment of keybusiness activities in organisations which may affect their stakeholders, sothat todayÕs small problems can be identified and prevented frombecoming significant tomorrow.

● Policies regarding whistleblowing often do not extend to: the protectionof alleged offenders; the protection of reporters from retaliation or thepreservation of their anonymity; or updates on progress of reports made.Each of these omissions is likely to discourage reporting.

There is little to gain and much to lose for potential reporters, especiallywhen one considers that the experience of many whistleblowers is thatthey end up losing their jobs. The advent of the Public Interest DisclosureAct in 1999 makes it crucial for organisations to create effective internalreporting channels and policies, so that employees do not feel they have toresort to reporting externally Ð with the protection of the law behind them.

● Feedback gathering mechanisms, such as employee surveys, are used byonly half of all participants (55%). Also, significant scope remains forcompanies to adopt a more systematic approach to gathering feedback.Few companies appear to use more than one method, yet each methodwill reveal different information. For example, surveys allow broadscanning to provide indications of possible problem areas while focusgroups allow in-depth probing of specific areas. Always starting with aclear understanding of need, organisations must select appropriatecombinations of mechanisms on a case by case basis.

The need to further develop business ethics programmes and theircomponents appears to be recognised. Two in five participants (41%)reported plans to modify their business ethics activities in the short term.These figures support a perception of business ethics management as anemerging function which is still very much on a learning curve, and onewhose importance is increasingly recognised.

4.2 Influences, impacts and challenges

Factors influencing organisations’ business ethics activities

The desire to protect or improve reputation is the most common factorinfluencing the development of business ethics activities in organisations,


The Public Interest Disclosure Act

makes it crucial for organisations to

create effective internal reporting

channels and policies.

The need to further develop

business ethics programmes and

their components appears to be

recognised. Two in five participants

reported plans to modify their

business ethics activities in the

short term.

The desire to protect or improve

reputation, and corporate

governance guidelines, are the

most common factors influencing

the development of business ethics

activities in organisations.

being reported by five out of seven participants (72%). Heavily brandedcompanies are more likely to have activities to manage business ethics,emphasising their value for protecting or enhancing reputation.

Adherence to corporate governance guidelines, a recurring topic during thelast decade, is the second most common factor, being reported by two out ofthree participants (68%). The recent Turnbull report, which emphasises theneed for robust internal controls to manage business risks, is likely to furtherstimulate activity.

In third place came Ôincreased emphasis on valuesÕ, reported by three out offive participants (58%). This is noteworthy because it signifies recognition bya majority of companies of the importance of values in guidingorganisational behaviour.

Only the top three factors were identified as main influences by more thanhalf of all participants. Notably, all three rank higher than even Ônewlegislation and regulationÕ.

Conspicuously low in the rankings are the influences of external and internalstakeholder pressures (16% and 12% respectively). However, whilestakeholder influence may have been low historically, other data from thesurvey suggests consultation of all stakeholder groups has increased duringthe last three years, so that their influence may have grown.

Impact of organisations’ business ethics activities on performance

Overall, existing business ethics activities are perceived to improve businessperformance, not hinder it. As organisations develop more sophisticatedprogrammes, the benefits should become more significant.

Participants perceive that their activities serve to protect their organisationsfrom significant risks, to some degree help grow the business, and even haveno negative impact on profitability. Risks such as breaches of law, regulationsor company standards, and reputation damage were perceived to besignificantly mitigated.

This outcome makes a strong case for business ethics programmes as creatorsof competitive advantage.

Attention to business ethics as a priority

While the case for prioritising business ethics in organisations is generallyaccepted by a majority of participants, it is not universally accepted. Inorganisations where business ethics is not a priority, a common reason is lackof buy-in by top management.

Three in five participants (62%) rated priority in their organisations as high,compared with one in five (21%) who rated priority as low. ParticipantsÕcomments on this subject were clear. Those rating priority as high typicallydescribed the subject as ÔfundamentalÕ, ÔessentialÕ or ÔcriticalÕ. At the other


Participants perceive that their

activities serve to protect their

organisations from significant risks,

to some degree help grow the

business, and even have no

negative impact on profitability.

Those rating priority given to

business ethics as high typically

described the subject as

‘fundamental’, ‘essential’ or

‘critical’. At the other extreme the

subject was typically regarded as

‘an overhead’ or one which ‘lacks

drive from the top’.

extreme the subject was typically regarded as Ôan overheadÕ or one whichÔlacks drive from the topÕ.

Awareness of business ethics risks

Employees and line managers, those who operate the business, are perceivedto be least aware of business ethics risks. Organisations must developstrategies to increase awareness, especially among line management Ð whichacts as the eyes, ears and voice of an organisation Ð so that it can anticipateand manage these risks. The low levels of this groupÕs involvement indeveloping/delivering codes and training represent lost opportunities toraise awareness.

Data analysis revealed relationships between awareness and use ofcomponents such as Codes of Conduct and training; companies which haveno codes or training, or do not provide them to all employees, are more likelyto have employees with perceived low awareness of risks.

Challenges arising from global operations

Over half of all participants (57%) reported having operations in three ormore of the worldÕs major regions, and many reported concerns regardingoperations in different parts of the world. These concerns generally centre onthe achievement of consistent standards and overcoming corruption issues ina single global market place which retains diverse cultures, value sets,languages, laws and regulations, and quality of life norms. All of thesecompete to influence employee behaviour.

The challenge is an old one and a growing one as more organisations goglobal, and there are no easy solutions. Managements need to be able both torecognise the existence of the issues and to be willing to confront them. Theuse of local champions in the diverse regions who can interpret bothcorporate expectations and local needs or constraints, is likely to be critical inmost cases.

Business ethics champions

All causes can benefit from a champion. A champion can make the differencebetween a programme which is lived and one which is ignored.

In most companies (83%) the business ethics champion is regarded as anindividual at or close to board level. In the remaining companies this role isperceived to be owned by a function such as Internal Audit, Legal orCompliance. A common and important theme is that the role has a goodvantage point from which to monitor all business operations andcommunicate with all parts of the organisation. Wherever the championresides, the role will be marginalised without support from top management.


Global ethics concerns centre on

the achievement of consistent

standards and overcoming

corruption issues in a single global

market place which retains diverse

cultures, value sets, languages,

laws and regulations, and quality of

life norms.

No matter how sophisticated an

organisation’s risk management

programme might be, if it does not

include a robust people risk

management programme it is

fundamentally flawed, because it

has not anticipated the risks of

wrongdoing.

Employees and line managers,

those who operate the business,

are perceived to be least aware of

business ethics risks. Analysis

revealed relationships between

awareness and use of components

such as Codes of Conduct and

training.

4.3 Commentary

Business ethics management is about managing people risk, which by itsnature exists in all parts of an organisation. No matter how sophisticated anorganisationÕs risk management programme might be, if it does not include arobust people risk management programme it is fundamentally flawed,because it has not anticipated the risks of wrongdoing.

Organisations are increasingly recognising the value of business ethicsprogrammes in managing reputation risk and ensuring compliance with lawsand standards, and the general perception is that they have a positive impacton organisational performance.

The cause of business ethics management is thriving, and organisationsappear to be evolving their programmes towards best practice, incorporatingmore key components as they do so. For those organisations which have yetto create any formal approaches, they can benefit from the experience of thefirst group, through studies such as this.

In our experience, in many organisations there is a need to adopt a moreholistic approach to the development and implementation of the componentsof business ethics programmes. Efforts on individual components will bewasted if they are perceived by employees to be inconsistent; they may evengenerate cynicism and therefore a negative impact. Components should bereviewed together to assess their interdependence, consistency and likelyoverall impact.

The usage of some valuable components of business ethics programmes isstill low, and in many cases superficial; they should be used more, and muchcan be done to use them more effectively. Many organisations still grapplewith how to make their people ÔliveÕ their values and codes; often the devil isin the detail Ð of the design, development, implementation and ongoingmaintenance Ð of all components, not just values and codes.

As business ethics programmes evolve, another danger is that they becometoo prescriptive or checklist oriented. While structure has a necessary place inthe design of such programmes, practitioners should always have underlyingobjectives in mind for whole programmes and individual components.

If practitioners fail to make programmes effective the perceived value of thisemerging function may decline, as managements become disillusioned dueto lack of results. The results of superficial interventions or inconsistentapproaches may even be negative impacts which reverse progress.

While the components of business ethics programmes are all-important,alone they are not sufficient. Success will ultimately depend on having theright combination of spirit and structure. Structure equates to business ethicsprogrammes, whereas spirit is concerned with issues such as personalcommitment from top management down. Commitment means not onlywillingness to devote resource, but also commitment via, for example,consistency of words and actions, fairness and fostering open discussion ofissues. Spirit alone is likely to fail to consistently reach all parts of anorganisation, whereas structure alone is likely to lack conviction.


Business ethics programme

components should be reviewed

together to assess their

interdependence, consistency and

likely overall impact.

The results of superficial

interventions or inconsistent

approaches may even be negative

impacts which reverse progress.

Success will ultimately depend on

having the right combination of

spirit and structure.

Corporate leaders will need to

demonstrate their personal

commitment, and practitioners will

need to develop systematic

approaches to progress

programmes and their constituent

components towards best practice.

The future for business ethics management and how much value it can addin organisations depends on both corporate leaders and practitioners. Theleaders will need to demonstrate their personal commitment, and thepractitioners will need to develop systematic approaches to progressprogrammes and their constituent components towards best practice.

If people are an organisationÕs most important asset, then positivemanagement of business ethics is not optional.


If people are an organisation’s most

important asset, then positive

management of business ethics is

not optional.

5 Results

5.1 Components of business ethics programmes

Despite the burdens of other priorities such as the ‘millennium bug’,

‘Euro’ issues and ever increasing pressures of costs, organisations have

devoted significantly increasing attention to the management of

business ethics, and are becoming increasingly sophisticated in this field.

0 10 20 30 40 50 60 70 80 90

Values/mission statements

Code of Conduct

Consideration of stakeholders’ needs

Periodic declarations/acknowledgements of

compliance

Reporting/advice channels (eg hotlines,

compliance officer)

Feedback gathering mechanisms (eg surveys,

focus groups)

Employees/departments with ethics

responsibility

Business ethics training

Ethical criteria included in reviews of

divisions/functions

Ethical criteria in employee appraisal/reward

systems

Assessment of business ethics activities by

external bodies

Other

Percentage of companies

Profile of business ethics programmes

Today

3 years ago


Without exception, the use of all reviewed components has increasedsubstantially compared to three years ago. This is a remarkable increase inactivity during a period when organisations have had to find additionalresources to address priorities such as the millennium bug and the launch ofthe Euro, and meet increasing demands for cost cutting.

This increased usage suggests not only greater interest but also greatersophistication, as the management of business ethics evolves.

Values/mission statements

Four in five participants (81%) reported use of such statements today,compared with just three in five (60%) only three years ago. As well asserving other strategic purposes, such statements can be very valuable fordefining and guiding an organisationÕs behaviour.

Values are concerned with how people go about achieving theirorganisationsÕ purpose or mission. Values impact culture, and culturedetermines behaviour. And an organisationÕs reputation is judged by itsbehaviour. In an increasingly complex and fast changing environment,values and mission statements provide common and fixed frames ofreference for all personnel in an organisation, without which behaviour islikely to vary from expectations. Management cannot expect to achieveexpectations which have not been clearly set.

However, the use of mission or values statements is no guarantee ofachieving desired behaviour. The words in the derived statements must beconsistent with the actions of managers in practice. A shared understanding ofthe way the company wishes to conduct business is more important than theexistence of formal statements. Inconsistency between words and actions atmanagement level is quickly spotted by employees, inviting cynicism and anegative impact. The process through which statements are developed, andhow they are expressed and communicated are also critical success factors.These processes should involve employees and managers early, to gain theirsupport and reflect their views, and thereby encourage ownership of the endproduct.

Codes of Conduct

The use of Codes of Conduct has increased from three in five companies(57%) to four in five companies (78%) over the last three years.

This increase is to be applauded, because a well developed andcommunicated Code of Conduct can be very effective for ensuring that acommon set of business standards is maintained by all relevant agents of anorganisation. However, Codes of Conduct created in isolation are unlikely tohave significant positive impact. Unless a Code of Conduct is underpinnedby a commonly accepted set of values and supported through actions bymanagers throughout the organisation, its impact will be limited.

Like values statements, Codes of Conduct should be carefully developed,


expressed and communicated. Most importantly, unless they are lived up toby those promoting them they may create a negative impact.


Two thirds of participants (69%) claim to consider the needs of stakeholderscompared to half of participants (51%) three years ago.

ParticipantsÕ comments indicated that common methods of consideringstakeholder needs are board and management meetings. More directfeedback is obtained from stakeholders by some companies via the use ofemployee and customer surveys. Some participants mentioned the use ofCodes of Conduct as a means of considering stakeholder needs.

Few companies appear to have a systematic approach for reviewing theneeds of stakeholders. Of those which reported considering their needs, mostreferred to limited groups of stakeholders rather than all. This contrasts withthe examples of a few well publicised approaches of companies which haveentered into extensive consultation with all stakeholders, often as a result ofrecent high profile criticism of their corporate behaviour.

The stakeholder approach is not a new one. Earlier efforts to formallyaddress the needs of stakeholders date back as far as the 1940s to academicliterature in the US. Earlier still, companies such as RowntreeÕs andCadburyÕs were well known for espousing social responsibility.

In reality of course, all organisations consider the needs of stakeholders tosome degree, albeit often in an informal manner. Recent initiatives in the UKrepresent attempts to develop more formal mechanisms for recognising,assessing and addressing stakeholder issues. Again, the degree to whichorganisations adopt these formal systems is not as important as the need torecognise that stakeholders, by definition, have an impact on, or are impactedby, an organisationÕs operations.

While exhaustive dialogue with all possible stakeholders might be regardedas extreme, there appears to be scope for most organisations to moresystematically review the key business activities which may affect theirstakeholders. Such approaches are more likely to catch small problems todayso that they can be prevented from becoming large problems tomorrow.

Periodic declarations/acknowledgements of compliance

The increasing use of periodic acknowledgements of compliance represents ashift in emphasis towards positive confirmation by employees, rather thanassumed compliance (67% increase). Being relatively straightforward todesign and implement, this large increase compared to some othercomponents is not surprising. The increased popularity may also reflectchanges in employer/employee relationships as a result of a more fluid, andless loyal employment market. If that is the case, then such initiatives mayerode trust between management and employees.


Nevertheless, periodic declarations can be very effective, if they are usedcorrectly. Part of their value lies in reminding employees of significant risksto them and the organisation. Their development, implementation andongoing maintenance must anticipate and avoid negative outcomes such asperceptions of mistrust and bureaucracy. Specifically, communications toemployees in each phase must clearly and consistently explain the purpose ofthe activity.

Reporting/advice channels and feedback gathering mechanisms

Organisations are making greater efforts to listen for feedback and signs oftrouble, just as one might monitor quality on a production line. Activitieswhich provide information to management have significantly increased inuse. The use of reporting/advice channels has increased by 64%, while theuse of feedback gathering mechanisms such as surveys and focus groups hasincreased by 83%. This demonstrates an increasing interest in identifyingissues internally and, presumably, confronting them, rather than risk futureproblems or reporting outside the organisation.

The advent of the Public Interest Disclosure Act in 1999 is likely to increaseusage of reporting channels much further. These mechanisms should bedesigned and implemented as part of an integrated business ethicsprogramme; Ôbolt onÕ reporting lines created in isolation are unlikely toexperience much activity, or reveal much useful information.

Employees/departments with ethics responsibility

The nomination of employees or departments with specific responsibilitiesfor business ethics is also on the increase, although the increase (50%) has notbeen as large as in other areas. Employees and functions are more likely toattend to responsibilities formally allocated to them. Consequently activitiescan be more focused, enabling programmes to evolve more rapidly towardsbest practice.

Across organisations no single function emerges as having responsibility forbusiness ethics. This is not a weakness in itself, unless the role has beenassumed by default. Having the right individual take ownership is asimportant as having the right function. What is critical is that those selectedhave good access to, and are easily accessible by, all parts of the organisation,and that they are adequately resourced.


Organisations have begun to recognise the need for and value of ethicstraining. The use of training increased by 111%, however overall use remainsrelatively low at only two in five participants (40%). It appears that manycompanies do not fully appreciate the opportunities to create effectivetraining programmes in this area. As discussed later in this report, much canbe done to improve the development, content and delivery of training, tomaximise its contribution.


As well as increasing understanding of expected standards and the risks ofwrongdoing, good quality training demonstrates and reinforces anorganisationÕs commitment. Used correctly, training is also an effective meansof helping employees to understand the relevance of all other components of abusiness ethics programme, and how these operate day to day.

Inclusion of ethical criteria in employee appraisal/reward systems and

in reviews of divisions/functions

Even these more intangible elements are showing clear signs of growth inpopularity (69% increase each). An example of such a criterion might be thepayout of performance bonuses only upon confirmation of acceptable ethicalperformance.

People adopt behaviour which is rewarded. While ethical behaviour is not aseasy to measure as other performance such as sales, its exclusion leaves a gap inoverall performance measurement. Measuring how as well as what is importantbecause the means can ultimately, and significantly, affect future ends.

Furthermore, employee cynicism is more likely in organisations which expectethical behaviour yet do not attempt to measure or reward ethicalperformance.

Assessment of business ethics activities by external bodies

The use of external organisations to assess activities has more than doubledover the last three years, albeit from a low base, to 14%. This increasedinterest may be indicative of a greater willingness to consider all possibleresources and expertise to achieve objectives. Using external assessors canoften be a more efficient and flexible means of resource utilisation than usingin-house personnel, and provide a more objective assessment. Through theassessment process, external assessors can also provide valuable training forin-house personnel, as well as access to best practices.

Where assessors are used, the critical success factor is to create a combinationof the right internal team which understands the business and the issues, andthe right external assessor which has both the functional and industrycompetency.

Two in five participants reported plans to modify their business ethicsactivities in the short term

Two in five participants (41%) reported plans to modify their business ethicsactivities in the short term (next 12 month period). The substantial number ofcompanies planning such modifications supports the perception of businessethics management as an emerging function which is still very much on alearning curve.


Different respondents identified different areas requiring modification,consistent with the characteristics of an emerging and still developingfunction.

Barriers to effective decision-making

The following scenario demonstrates a variety of challenges which employeesoften face in day-to-day activities and which can result in inappropriatedecision-making. These challenges are universal and fundamental. By providingemployees with clear guidance to help anticipate and address them, a significantaspect of business ethics risk can be neutralised.

An opportunity exists in your bank to secure a significant new depositorclient, who would like to open an account with £80m initially. The KeyAccount Manager is keen to open the account, which may increase hisperformance bonus. To comply with money laundering requirements,the bank must verify the identity of new clients. The Customer Servicesdepartment judges that more evidence is required than has beensupplied by the client, yet the client is insisting that his account beopened immediately. The Key Account Manager has given thiscommitment to the client, and proposes that Customer Services requeststhe remaining evidence later, so that the opportunity is not lost.

Continued overleaf

0 2 4 6 8 10 12 14 16 18 20

Values/Codes of Conduct

Review/reinforce current business ethics programme

Planned activities of organisations intending to modify their business ethics activities

in the short term

Percentage of respondents

Monitoring

Training

Communication

Reporting channels

Decide after reviewing this survey

To be decided

Other

Address global issues

Update grievance procedure


5.2 Analysis of individual components

Codes of Conduct

There has been an explosive growth in the use of Codes of Conduct in thelast five years


>20

11-20

6-10

<6

When companies issued their first Code of Conduct

0 10 20 30 40 50 60 70

Number of years since issuing first Code of Conduct

Should Customer Services respond by refusing the application orimmediately processing it?

What are the implications of either course of action, to the bank and tothe employees involved? Is there a middle ground? Can the bank openthe account, freeze the assets and not release them until verification hasbeen completed? Would employees behave differently depending onwho might learn about the transaction, and what support they perceivethey have, or do not have, in the bank? Would actions be consistentacross the bank or would they vary by Key Account Manager? Wouldthe manager act in the best interests of the bank on a consistent basis?Should this instance be reported as ÔsuspiciousÕ under the moneylaundering reporting requirements, making it reportable to theauthorities; if reported, what is the impact on the bankÕs relationshipwith the new client? What are employeesÕ personal exposures?

Money Laundering issues are a common concern in financialinstitutions. Employees can be jailed if deemed to be in breach ofrequirements. Not opening the account may be perceived to reduceregulatory or legal exposures. However, the new opportunity may bejeopardised or the new relationship damaged. Opening and freezing theaccount ensures that any funds from illegal sources are captured. Viewsdiffer widely, even within organisations, on the right approach.

Without guidance how are employees likely to respond? Best solutionsare likely to include adopting clear and realistic policies, and raisingemployee awareness of the bigger picture beyond the immediateopportunity by: anticipating such challenges, recognising when theyneed help, understanding what resources are available to them,recognising the pressures that can arise to violate normal policy, andrecognising their personal exposure as well as that of the organisation.


Three out of five respondents (61%) first launched their Code of Conduct nomore than five years ago, and most (86%) first launched their Code ofConduct no more than ten years ago.

Codes of Conduct appear to be one of the most popular means of addressingthe growing needs for managing business ethics. This is not surprising as aCode of Conduct is a tangible product in a relatively soft subject area, and agood means of communicating expected behaviour. However, while they canplay a central role in maintaining corporate standards, they are no panacea,as discussed in other parts of this report.

Companies who have had Codes of Conduct for many years have alsorecently been more active in updating them

The survey data indicates an average period of seven years between firstissue of a Code of Conduct and last update.

While many companies have only recently created Codes of Conduct, thosewho have been using them for longer periods have been updating them overthe last three years, again reflecting the general increase in perceivedimportance and activity in recent times.


1999

1998

1997

1996

1995

1993

1990

Last update of Code of Conduct

0 5 10 15 20 25 30 35 40 45 50

Year of last update


One in five companies which have Codes of Conduct do not issue them toall employees

* ÔCertain employees onlyÕ Ð the majority of respondents identified thiscategory as managers, supervisors and white collar staff.

Where Codes of Conduct exist, they are issued to all employees in four out offive companies (80%).

Codes of Conduct, by definition, should be issued to all employees.Wrongdoing can and does occur at all levels in organisations, and in allfunctions. By excluding some employees organisations lose an opportunity tocommunicate expected standards and risk fostering a divisive Ôthem and usÕculture. Where some parts of a code may not be relevant to all employees,this can be specified in the content. Where some parts of the code containsensitive information, this should be removed and located in an alternativeguidance document. A well constructed Code of Conduct is a valuable meansof communicating expected standards of behaviour to all employees.

A number of companies appear to recognise that it is important tocommunicate standards to others also, such as suppliers, regulators andcustomers. Sometimes this is wholly necessary, for example where suppliersare required to achieve certain standards. This approach can also have veryvaluable public relations benefits, as long as the expected standards areachieved.

A few organisations even issue their codes further afield Ð for example toconstituency MPs and local authorities. Sharing formal policy documentssuch as these can make powerful statements of an organisationÕs publiccommitment to minimum standards of behaviour. Such actions are alsoexamples of the informal ways in which organisations listen to and respondto stakeholders.


All employees

Suppliers

Certain employees only*

Business partners

Regulators

Shareholders

Company agents

Customers

Recipients of Codes of Conduct

0 10 20 30 40 50 60 70 80


Almost half of all respondents do not make their Codes of Conduct publicly available on request

Almost half of all respondents (45%) do not make their Codes of Conductpublicly available on request. Sharing the Code of Conduct publicly can havesignificant benefits:

● it advertises an organisationÕs commitment to specified standards ofbehaviour;

● it reinforces the organisationÕs commitment to achieving minimumstandards Ð publicising standards can motivate their achievement,provided they are realistic; and

● it suggests Ð and promotes Ð a culture of openness.

Conversely, resisting requests for copies of such documents may createsuspicion and doubt in the mind of the requester. Some organisationsgenerate significant goodwill by publishing their codes on their websites.

A common reason stated for restricting access is that the Codes of Conductcontain proprietary information. Where this is the case, organisations shouldconsider relocating such content to other documents with a reference in theCode of Conduct, so that the latter may then be made public.

This resistance to sharing the contents of a Code of Conduct may suggest alack of confidence of an organisation in its ability to adhere to the code Ð ifthis is the case an ineffective code may even be damaging the organisation bycreating cynicism. The solution is to address why the standards in the codemay not be achieved, not permanently maintain a low profile.

Availability of Code of Conduct to all parties including general public

Not available to all 45%

Available to all 55%


Few groups contribute to the development of Codes of Conduct

Across all organisations, a variety of groups appear to contribute to thedevelopment of Codes of Conduct. While this might suggest healthycollaboration between relevant departments, investigation of the data revealsthat in any one organisation, few groups participate.

Of course, all listed groups can make a meaningful contribution to a Code of Conduct. Collaboration, while it will involve balancing the needs of morestakeholders and more resource, is likely to yield a better end-product. Forexample, groups such as Internal Audit and Corporate Affairs/PublicRelations can provide valuable input based on their experience fromindependent monitoring of operations or previous occurrences ofwrongdoing.

Organisations should involve representatives from all intended audiencegroups in the creation process to develop codes that are relevant, realistic,and usable, and encourage buy-in. Codes created in isolation of the intendedaudience are more likely to appear alien and irrelevant, and may lead it toperceive that management is out of touch. In this respect the low figure forinvolvement of line management is of particular concern.


Legal/Compliance

Company Secretariat

Human Resources

Internal Audit

Corporate Affairs/Public Relations

Line management

Risk Management

Senior management

External consultants

Other

Groups which contribute to the development of Codes of Conduct

0 10 20 30 40 50 60 70



Input to business ethics activities by all stakeholders has increased,however overall activity appears to have levelled off

Stakeholder consultation has increased compared to three years ago,although overall activity appears to have levelled off. The general trend hasbeen towards inclusion of all groups, both inside and outside theorganisation.

In three out of five companies (57%), employees are involved in theseactivities, traditionally more the remit of ÔmanagementÕ or ÔboardÕ. Notsurprisingly, management/board involvement has also increased.

0 10 20 30 40 50 60 70 80 90 100

Management

Board of directors

Employees

Regulators

Customers

Owners (shareholders, partners)

Suppliers

Business partners

Company agents


Stakeholders providing input to business ethics related activities

In 3 years

Today

3 years ago


Not far behind employees are the regulators, another group whose powercan stop an organisationÕs business in its tracks.

In the more general case, some level of awareness of stakeholder issues isnecessary by definition; all stakeholders are affected by or affect allorganisationsÕ activities. The important decision is how far an organisationgoes to monitor and address stakeholder impact, and how it does these.

A stakeholder approach

The following scenario highlights some of the complex issues involved inadopting more formal, stakeholder-based, approaches in organisations byconsidering some of the challenges involved in creating an ethical investmentfund. As the ethical investment movement in fund management, and theÔinclusiveÕ stakeholder-based movement in corporate management both develop,perhaps each can learn some aspects of best practice from the other.

Your organisation is an investment fund manager facing a newchallenge as a result of legislative requirements for pension fundtrustees to declare their policies on Socially Responsible Investment.This is a new area for your organisation and in recognition of growingdemand, you wish to create an ÔethicalÕ fund. How will you go aboutthis, and what are the risks?

What is the scope and definition of your ethical fund? How will youdetermine which potential investee companies are ethical Ð by theirpolicies, products or actions? How will you respond to changes in aninvestee companyÕs activities over time, during which its ethicalperformance may change? How will you manage the risks to the fund iffor some reason your own organisation is criticised for perceivedunethical behaviour?

Beyond clear terms of reference specifying the scope and definition ofÔethicalÕ as it applies to your fund, best solutions are likely to includedialogue with key stakeholders such as lobbying groups, the investeecompanies themselves, investors and your organisationÕs own seniormanagement. One of the challenges will be to reconcile the expectationsof stakeholder groups, which may conflict. Close monitoring of investeecompanies and the marketplace over time is also likely to be necessary.This monitoring should include testing for changing views of keystakeholders. To facilitate the activity, it may be appropriate to create areview panel consisting of stakeholder representatives.



Of all companies which provide training, two in five restrict it to certainemployee groups only

* ÔCertain employees onlyÕ Ð the majority of respondents identified thiscategory as managers, supervisors and white collar staff.

These results indicate a similar pattern to those for issuing Codes of Conduct.Some of the same comments apply and are repeated here.

Where training is provided only three in five companies (61%) provide it toall employees.

Ethics training of some form, whether stand-alone or incorporated intoexisting programmes, should be provided to all employees. Wrongdoing canand does occur at all levels in organisations, and in all functions. A wellconstructed and delivered training programme is a powerful means offacilitating adherence to expected standards. Furthermore, where training isrestricted to some employees only this may foster a divisive Ôthem and usÕculture.

Coverage of all employees need not necessarily require substantial fundingor business disruption; by varying training content, format and deliverymeans, organisations can ensure coverage of all employees while minimisingcost and disruption.

Although some organisations issue their Codes of Conduct to somesuppliers, business partners and company agents, none appear to includethese same parties in their training programmes.

While cost and disruption are very legitimate considerations, need shouldremain the overriding criterion.


All employees

Certain employees only*

Other

Business ethics training audiences

0 10 20 30 40 50 60 70


Few companies utilise the range of tools available to maximise value intraining

Where training is provided, in the majority of cases it does not venturebeyond communication of standards and resources. Perhaps mostremarkably, only one in four companies (27%) train employees inunderstanding the causes of poor decision-making and unethical conduct.Organisations which limit their training in such ways will not maximiseeffectiveness and worse, run the risk of efforts being perceived as superficialand Ônot seriousÕ. A variety of tools exist, and are employed by someorganisations to create meaningful training.

Improving communication Ð resources available

Only three in five companies (61%) provide training in resources availablefor guidance. By encouraging individuals to seek out guidance when they areunaware of requirements or in doubt, small issues can be prevented frombecoming large problems.

Improved learning Ð practical application of standards and sharingparticipant experiences

Only one in two companies (48%) provide training in the practicalapplication of standards. Methods such as case studies and simulationsprovide participants with the opportunity to practice applying the standardsin complex situations in a risk free environment. Without such training, theinformation imparted is likely to be less meaningful to participants, leavingthem feeling that the training is irrelevant for their role or losing theopportunity to explore the finer points.

Only two in five (43%) companies include sharing of participantsÕexperiences in their training. By sharing experiences, all participants aremore likely to be receptive to the training, because it reflects their daily workchallenges rather than theory. The interactivity also stimulates deeperthinking about the issues, and aids learning.


Communications of standards (eg policies, regulations, values)

Communication of resources available forguidance (eg manuals, compliance officers)

Practical application of standards in realisticsituations

Sharing of participant experiences

Teaching decision-making models andframeworks

Understanding why poor decision-making orunethical conduct occurs

Content of business ethics training

0 10 20 30 40 50 60 70 80 90 100


Improving competency Ð teaching decision-making models and causes ofpoor decision-making

Decision-making models are tools which aid understanding of the factorswhich influence people to behave the way they do. No more than one inthree companies (32%) teach decision-making models or explore why poordecision-making occurs. Such components of training help employees tostructure their thinking about situations to recognise defining characteristicsand associated possible solutions.

Few groups contribute to the development and delivery of business ethicstraining


Human Resources

Legal/Compliance

Company Secretariat

Line management

Internal Audit



Risk Management

Corporate trainers

Other

Groups which contribute to the development of business ethics training

0 10 20 30 40 50 60 70 80


Again, these results indicate a very similar pattern to those for thedevelopment of Codes of Conduct. Similar comments apply and are repeatedhere. Across all organisations, a variety of groups appear to contribute to thedevelopment and delivery of training. While this might suggest healthycollaboration between relevant departments, investigation of the data revealsthat in any one organisation, few groups participate.

Of course, all listed groups can make a meaningful contribution to training.Collaboration, while it will involve balancing the needs of all stakeholdersand incur more resource, is likely to yield a better end-product. In particular,all intended audience groups should be consulted, to help create trainingwhich is relevant, realistic and audience friendly, and encourage buy-in. Ofparticular concern is the lack of involvement of line management.

Reporting/advice channels

Many companies have reporting channels other than line management

0 10 20 30 40 50 60 70

Supervisor/department manager

Compliance/Legal/Ethics office/HumanResources or similar

Helplines for raising concerns or seekingguidance

Hotlines for reporting suspected misconduct

Channels for reporting wrongdoing/seeking advice



Human Resources

Legal/Compliance

Line management

Company Secretariat

Corporate trainers


Internal Audit


Risk Management

Other

Groups which contribute to the delivery of business ethics training

0 10 20 30 40 50 60 70 80


As well as facilitating the communication of specific issues or queries,reporting/advice channels can also provide valuable feedback, indicatingemployee attitudes towards and perceptions of existing policies andpractices.

A significant number of companies reported the use of channels other thanline management, reflecting a need to allow employees to communicateindependently of the line structure Ð this can be a very valuable alternative,for example when reporting the actions of people in the line. Access topersonnel in roles outside line management is the most common alternativechannel for reporting issues or seeking advice.

Helplines and hotlines

Helplines and hotlines are also common. These can be useful complementarymechanisms to provide those who require it the facility to communicate off-line, or perhaps anonymously. However, they should not be seen assubstitutes for the other forms listed, through which more effectivecommunication and learning is likely to be achieved.

While the amount of data submitted by survey participants on Ôcalls receivedÕwas low, the available data suggests that helplines/hotlines do not appear tobe heavily used. Of the responses received, 60% reported no usage whatsoever.The low usage may reflect an aversion to whistle-blowing on colleagues, lackof a need, or lack of awareness of or confidence in the mechanism.

Even though usage may be low, the existence of a well designed help-line/hotline which forms part of an integrated overall solution can have apositive effect, giving comfort to employees that management is committedto providing employees with alternative means of communication.

By periodically determining root causes of usage or non-usage, much can belearned by about employeesÕ perceptions of an organisationÕs commitment toresponsible business practices, and changes in these perceptions over time.For example, usage may be low because employees fear retaliation or thattheir identity will not remain anonymous, or because they are not confidentthat calls will be investigated properly.

More needs to be done, and can be done, to encourage reporting ofwrongdoing

0 10 20 30 40 50 60 70 80 90

Protect reporters from retaliation

Preserve the anonymity of reporters

Protect alleged offenders

Communicate progress to reporters

Policies for the reporting of wrongdoing



In half of all companies (55%) with reporting/advice channels, no policyexists to protect alleged offenders. Such omissions are likely to hinderobjectivity and fairness in the review process. In one quarter of all companieswith reporting/advice channels (24%), there is no policy for preserving theanonymity of callers. In one fifth of companies (20%) no policy exists toprotect reporters from retaliation.

All of these omissions are likely to discourage reporting. Futhermore, in themany companies (51%) which have no policies to inform reporters ofprogress, future reports are also less likely to occure.

Reported cases of whistleblowing in the UK suggest that the reporter oftenends up as a victim, with the company giving an appearance that it wouldreally rather not have known. Research of the US and UK markets suggeststhat most whistleblowers end up losing their jobs. When one considers theeffects occurrences such as these may have on others in the organisation, it iseasy to understand why employees are hesitant to report misconduct, andwhy governments deem it necessary to protect whistleblowers. With theadvent of the Public Interest Disclosure Act in 1999, the onus is firmly onemployers to encourage internal reporting, so that employees do not feelobliged to report externally Ð with the full protection of the law behind them.

By creating and communicating robust policies in these areas, companies aremore likely to create an environment where employees feel comfortablecoming forward with questions and concerns. This will increase theprobability that any wrongdoing will be revealed early and internally.

Policies to encourage whistleblowing

Employees represent probably the best source of information in anyorganisation, but too often this source is overlooked or the messages go unheard.The following scenario illustrates the challenges of creating policies whichencourage reporting of suspected wrongdoing.

Your organisation is a major UK consumer goods retailer. Itsprocurement activity is significant, at around £600m per annum and youare concerned about the risks of fraud, for example via collusionbetween buyers and suppliers. Fraud in the procurement activity couldlose your organisation millions of pounds, cause significant damage tomorale and ultimately destabilise the relationship with yourshareholders. There is a company hotline for reporting suspectedwrongdoing, yet it receives very few reports. Your employees areprobably your most valuable source of information about what is goingon in the organisation, if you can only harness that potential. What couldyou do to encourage a culture where reporting suspected wrongdoing isregarded more as a matter of duty than as, at best, a last resort?

How do you ensure that those who do report are heard, before theyresort to reporting outside the organisation? How are you going to

Continued opposite


Feedback gathering mechanisms

Only one in two participants (55%) reported the use of feedback gatheringmethods. The different methods provide different information, yet fewcompanies appear to use more than one method

Half of all participants (55%) reported use of some form of feedbackgathering mechanism. However, few participants reported use of more thanone method.


Surveys

Focus groups

Management

Employee forums/groups

Team/Cascade meetings

Internal Audit/Legal/Compliance

Other


0 5 10 15 20 25 30 35 40 45 50 55 60

encourage honest reporting, while discouraging malicious reports whichhave no foundation in truth? How can you simultaneously protect therights of your organisation, the reporter and the alleged offendersduring any investigation following a report? What are the legalimplications? What are the reputation implications with respect to youremployees, suppliers, shareholders and customers?

Whether or not a formal channel exists for reporting suspectedwrongdoing, all organisations need clear policies which guide thebehaviour of reporters and recipients of any report. To be effective, thesepolicies must address how reporters acting in good faith will beprotected (and perhaps even rewarded?), how malicious reports will bedealt with, how the accused will be protected during any investigation,and how internal controls will ensure that reports are handled promptlyand objectively. In recognition of the fact that attitudes towardsreporting will be linked inextricably to the perceived culture of theorganisation, policies must acknowledge and reflect that same culture, ifthey are to be believed. How are your policies going to be integrated sothat they reflect the spirit of your business ethics programme? Finallyhow will you ensure that they are applied as intended? While many ofthese assertions may appear to be obvious, the experience ofwhistleblowers in the UK and US suggests that even where policiesexist, they are often not effective.


The different methods used each can provide valuable information, but ofdifferent kinds. For example: employee and customer surveys can help toidentify key issues across a wide range of subjects at a high level, whereasfocus groups can reveal more in-depth, qualitative information on specificareas. Organisations need to carefully consider which data gatheringmethods are most appropriate on a case by case basis. Where only onemethod is used, relevant information is likely to be missed. A clearunderstanding of the type of information required, and the ability to selectthe most appropriate combination of methods to gather it, is essential.

5.3 Influences, impacts and challenges

Reputation, corporate governance and increased emphasis on values are perceived to have most influenced the development ofbusiness ethics activities

0 10 20 30 40 50 60 70 80

Desire to protect/improve reputation

Corporate governance guidelines

Increased emphasis on values

New legislation/regulations

Expanding international operations

Recognition of increasing speed of change

Growth

Change of management

Negative publicity

Fraud or other irregularities

Protection of senior management

External stakeholder pressure

Merger, acquisition or de-merger

Reorganisations

Internal stakeholder pressure

Breach of existing legislation/regulations

Other


Factors influencing development of business ethics activities


Most participants reported a variety of factors as influencing their businessethics activities.

The desire to protect/improve reputation is the most common influencingfactor (72%). Further analysis of the data reveals that of all participants,heavily branded companies are more likely to have developed businessethics activities, emphasising the value of such initiatives for protecting orenhancing reputation.

ÔCorporate governance guidelinesÕ was the second most influential factor(68%). National corporate governance initiatives over the last decade appearto have made their impact, perhaps strengthening the case for similar,authoritative but not necessarily mandatory approaches, in other areas. Therecent Turnbull report, with its increasing emphasis on risk management, islikely to stimulate further activity.

In third place comes Ôincreased emphasis on valuesÕ, indicating a recognitionby many organisations of the importance of values in driving behaviour (58%).

Notably, each of the above ranks higher than even Ônew legislation andregulationÕ.

The relatively low rankings of external and internal stakeholder pressure areconspicuous (16% and 12% respectively). Other data from this surveyindicates that consultation with various stakeholders has increased. Thissuggests that although stakeholder pressure may not have been the reasonwhy organisations originally implemented ethics programmes, theirinfluence may have grown.


Overall, existing business ethics activities are perceived to improvebusiness performance

Overall, participants reported that there is a positive impact on almost allreviewed outcomes as a result of their organisationsÕ business ethicsactivities.

Issues which can significantly damage an organisationÕs bottom line Ðbreaches of law, regulations or company standards, reputation damage andfraud or other irregularities Ð are perceived to be significantly mitigated bybusiness ethics activities.

The group of outcomes occupying the mid-range of scores, from Ôethicalbehaviour under pressureÕ to Ôgrowth of the businessÕ, indicate some benefitfrom existing efforts.

Even profitability, which can sometimes be reduced in the short term byethical behaviour, is perceived not to be negatively impacted overall.

As organisations gain more experience and become more sophisticated intheir use of the variety of business ethics programme components, they arelikely to gain further benefits in each of these areas.

1 2 3 4 5

Compliance with legal, regulatory and

company standards

Reputation

Combating fraud and other irregularities

Ethical behaviour under pressure

Quality of management

Product/service quality

Winning new/repeat business

Employee morale and commitment

Quality of employee decision-making

Growth of the business

Productivity

Profitability

Impact of organisations’ business ethics management activities

Highly detrimental Highly beneficialImpact of business ethics activities


The case for prioritising business ethics appears to be generally, but notuniversally, accepted

Three in five companies (62%) rated business ethics as having high priorityattention (score 4 or 5), compared with one in five companies (21%) whichrated attention as low priority (score 1 or 2).

Typical reasons given by participants for rating business ethics as a highpriority included:

● ÒAn essential part to our infrastructureÓ

● ÒThe way we behave as an organisation is criticalÓ

● ÒFundamental to our businessÓ

● ÒEssential for reputation and employee moraleÓ

● ÒThere is now an expanded view of ethics which needs to be addressedÓ

● ÒOur management culture has long been to consider reputational risk aspart of the normal decision making processÓ

Typical reasons for rating business ethics on a low priority included:

● ÒViewed as an overheadÓ

● ÒLacks drive from the topÓ

● ÒOther more pressing issuesÓ

● ÒLack of timeÓ

These outcomes serve as a reminder that even though the reasons forprioritising business ethics may be clear to some, they also need to be clear toand bought into by others, including those leading organisations.

0 5 10 15 20 25 30 35 40

Urgent priority 5

4

3

2

Low priority 1

Attention to business ethics as a priority in organisations


Score


Those who operate the business, employees and line managers, areperceived to be least aware of business ethics risks

Those who work Ôat the coalfaceÕ and represent the majority of theorganisation, employees and line management, are perceived to be leastaware of the risks.

These perceptions strongly suggest needs for raising levels of awarenessamongst all employees and supervisors in organisations, so that businessethics issues are readily recognised and can be dealt with before they growinto larger exposures. Line managementÕs role is central; it is this groupwhich acts as the eyes, ears and voice of the organisation to monitor andsupervise business activity. Its low levels of involvement indeveloping/delivering codes and training, as discussed elsewhere in thisreport, represent lost opportunities to raise awareness of risks.

The needs appear to be supported by analysis of current practices; asdiscussed earlier in this report, many of the organisations which have Codesof Conduct or provide training do not provide them to all employees. Thereare correlations between perceived employee awareness of business ethicsrisks and existence or provision of Codes of Conduct and training. Forexample: almost all participants who regard employee awareness as highhave Codes of Conduct and business ethics training (94% and 89%respectively); among participants regarding employee awareness as low thefigures fall to 68% and 39% respectively.

Not surprisingly, key senior management and affected functions such asaudit are generally perceived to be aware of the business ethics risks in theirorganisations. This is likely to be in part as a result of these same groups

Average score Very much aware

1 2 3 4 5

Survey respondent*

Internal Audit

Finance Director

Chief Executive

Chairman

Non Executive Director

External Audit

Line management

Employees

Awareness of business ethics risks in organisations

Not at all aware

* Survey respondent – see section 6 for profiles


having to manage the fall-out from acts of wrongdoing. The personal andorganisational exposures involved also naturally heighten awareness in thesegroups.

Global ethical challenges are a significant priority in a global market place

More than one in three participants (38%) have operations in all majorregions of the world. Three in five (57%) have operations in at least threeregions of the world.

Many participants identified ethical challenges arising as a result of theirinternational operations. Typical comments are categorised below:

Consistent standards

● ÒEnsuring consistent systematic treatment across the geographical spreadof our organisationÓ

● ÒSelling in many developing countries where standards are differentÓ

● ÒAssuring compliance across a multitude of jurisdictions with differentvalues, on a consistent basisÓ

● ÒWorking overseas; terms of arrangements with local partnersÓ

● ÒOrganisation has inherent in it a high standard of behaviour and islargely UK focused. Importance is growing as we seek to workincreasingly overseasÓ

● ÒManaging operations in developing countries, where cultural and ethicalworries differ from UK and western benchmarksÓ

● ÒAssumption that people understand the ÔrulesÕ when sometimes theydonÕt!Ó


UK

Continental Europe

Americas

Asia/Pacific

Middle East/India/Africa

All regions

Operations by geographical region

0 20 40 60 80 100


Corruption

● ÒEmployees have been seeking guidance increasingly over the past yearon ethical issues overseas, such as facilitation payments and conflicts ofinterestÓ

● ÒRisk of Ôback-handersÕ on new overseas JVsÓ

● ÒWhen asked to bribe a judge (abroad) for return of a company car, bribewas not paidÓ

● ÒAvoidance of corrupt practices/pay in some third world countriesÓ

● ÒBribery and corruption in the emerging markets in which we dobusinessÓ

Other

● ÒThe pilot ethics training course resulted in our Vietnam office elevatingethics onto their regular management team agendas, and was also thestimulus for our Internal Audit function introducing 'ethics audits' intoselected overseas units"

● ÒHuman rights promotion in developing countriesÓ

● ÒIncreasing expansion of the group outside the UK into the Asia Pacificregion and greater focus on ethical issues by many stakeholders,especially institutional shareholdersÓ

● ÒNeed to work in foreign jurisdictionsÓ

● ÒAssumption that it is all Ôcommon senseÕ and not worth the effortÓ

While the world is becoming a smaller place for business, it retains diversecultures, value sets, languages, laws and regulation, and quality of lifenorms. Such factors all compete to influence employee behaviour, andstakeholder reactions to behaviour. No wonder then, that organisations havedifficulty in achieving consistent standards.

There are no quick, ÔeasyÕ or Ôfix and forgetÕ solutions. Management must beable to identify the issues and willing to confront them. The use of localchampions in the regions to interpret both corporate needs and localenvironments can help to create a closer ÔfitÕ.


Global ethics

The following example aims to demonstrate just some of the complexities ofdealing with the challenges of ethics in a global market place, and how a basicstakeholder assessment can help to transform a threat to the business into apositive outcome.

Your organisation is a global marketer of sporting goods which sourcesmost of its product from developing countries using low cost labour.You discover that your suppliers in one of these countries are usingchildren as young as six years old to make the product, and paying themvery low wages even by local standards. If you divert production toother sources, what are the implications on your costs, your suppliers,the children they employ and their families, and your reputation?

If you divert production, how do you ensure that costs remainacceptable and avoid similar occurrences in the new location? How aresuppliers likely to retaliate towards your expatriate employees in thecountry you leave? Will the children who lose their income be forcedinto worse situations to replace it in order to support their families, forexample prostitution? How would judgement be affected if you believedthe media were about to profile your operations in this country asÔexploitationÕ?

Through a process of concerted planning at an industry level in somecases and trial and error in others, organisations facing these real issuesare evolving their approaches towards best solutions. These includemaking employees aware of the issues, alternatives and risks, settingpolicies which recognise and allow for local realities, and ensuring thatemployeesÕ actions are consistent with those policies. In this scenario,close dialogue with local employees, suppliers, their employees, localaid organisations and government bodies may help to identify ways todevelop more acceptable employment in the same community overtime, whereas knee-jerk reactions are more likely to fail to address rootcauses and generate negative outcomes for many stakeholders.


The role of business ethics champion is perceived to reside primarily,

but not exclusively, on or close to the board

While business ethics in an organisation ought to be everyoneÕs concern, allcauses can benefit from a champion. The existence of a champion can makethe difference between an effective business ethics management programmeÐ one which demonstrates an organisationÕs commitment and is thereforevalued by employees, and an ineffective one Ð one which lacks convictionand is therefore ignored by employees. Participants identified a wide varietyof individuals or groups as champions.

In most companies (83%), the champion is regarded to be an individual onthe board or close to it. Notably, in a smaller but significant number ofcompanies (17%), the champion is regarded as a corporate function, otherthan the board itself: Internal Audit, Legal or Compliance. Conspicuous bytheir absence on this list are the Human Resources and Corporate Affairsfunctions; correctly aligned, each group can contribute much to the cause ofbusiness ethics management, whether as champions or in some supportingrole.

It is no surprise that many champions have a role on or near the board; for anall-pervasive issue such as business ethics, champions require influence atthe highest levels in the organisation. Because champions by their nature areas much born as bred, it is also not surprising to find them in roles outsidethe board. A common theme is that in all cases the individual or group has agood vantage point from which to monitor all business operations and tocommunicate with all parts of the organisation. Wherever the championresides in an organisation, the role will be marginalised without supportfrom top management.

0 5 10 15 20 25 30 35 40 45

Board/board member

Senior management

Company Secretary

Legal/Compliance

Internal Audit

Business ethics champions



6 Survey process, responsesand participant profiles

6.1 Process

An advisory panel of corporate leaders, business ethics practitioners andspecialists from Arthur Andersen, London Business School and otherinstitutions was created to guide survey content, process and reporting.

In the summer of 1999, leading UK companies were invited to participate inthe survey by completing a questionnaire designed to profile how theyperceive and manage business ethics issues. In most cases, invitations weresent to Company Secretaries. Previous research suggested that this group ismost commonly responsible for ÔowningÕ business ethics programmes.

6.2 Responses and participant profiles

The results of the survey are based on responses from 78 of the UKÕs leadingcompanies. The responses were from both FTSE 350 companies (55%) andnon-listed companies, ensuring good representation from both sectors.

Audit 2%

Risk Management 2%

Human Resources 2%

Finance 5%

Corporate Affairs 7%

Compliance 9%

Director 11%

Legal 11%

Company Secretary 51%

Survey participants by function


Manufacturing 33%

Telecommunications 2%

Insurance 4%

Financial markets 8%

Energy and utilities 9%

Real estate 11%

Commercial services 12%

Consumer products 21%

Industry profile of the FTSE 350

Consumer products 32%

Real estate 1%

Insurance 5%

Telecommunications 9%

Manufacturing 10%

Commercial services 10%

Energy and utilities 12%

Financial markets 21%

Industry profile of participating companies


>100,000 4%

50,001 – 100,000 11%

25,001 – 50,000 13%

5,001 – 25,000 29%

500 – 5,000 34%

<500 9%

Number of employees in participating companies

>5,000 20%

1,001 – 5,000 36%

501 – 1,000 12%

101 – 500 28%

<100 4%

Global annual turnover of participating companies – £m


7 Further information

7.1 Arthur Andersen

Arthur Andersen helps clients find new ways to create, manage and measurevalue in the rapidly changing global economy. With world-class skills inassurance, tax, consulting and corporate finance, Arthur Andersen has morethan 72,000 people in over 80 countries who are united by a single worldwideoperating structure that fosters inventiveness, knowledge sharing and a focuson client success. Arthur Andersen is a business unit of AndersenWorldwide.

Business ethics consulting at Arthur Andersen

The Ethics and Responsible Business Practices consulting group at ArthurAndersen is one of several specialist business risk management consultingunits within the Assurance and Business Advisory division. The unitcomprises business ethics specialists who team with other professionals inour organisation Ð specialists in business processes, in particular industries,in financial markets regulation, in fraud investigation etc Ð as appropriate tothe particular needs of each assignment.

Contact details

For further information please contact:Harish S. BhayaniArthur Andersen1 Surrey StreetLondonWC2R 2PS

Telephone: 0207 304 1388Fax: 0207 438 3372

E-mail [email protected]

7.2 London Business School

Founded in 1965, London Business School aims to be the most important andrespected international business school, generating work and ideas that havea powerful, lasting and world-wide impact on the learning and practice ofmanagement by key business leaders. The School's thriving communityconsists of world-renowned faculty, culturally diverse students, globalcorporate partners and international alumni. London Business School was


recently placed number one in Europe and eighth overall in the FinancialTimes ranking of international business schools Ð the only non-US school tobe ranked in the top ten.

Contact details

For further information please contact: Joan Concannon/Sarah RudramTelephone: 0207 706 6866/706 6972Fax: 0207 724 8433

E-mail [email protected], [email protected]


8 Index of charts

Page

Components of business ethics programmes

Despite the burdens of other priorities such as the Ômillennium bugÕ, ÔEuroÕ issues and ever increasing pressures of costs, organisations havedevoted significantly increasing attention to the management of businessethics, and are becoming increasingly sophisticated in this field 16

Two in five participants (41%) reported plans to modify their business ethics activities in the short term 20

Codes of Conduct

There has been an explosive growth in the use of Codes of Conduct in the last five years 22

Companies who have had Codes of Conduct for many years have alsorecently been more active in updating them 23

One in five companies which have Codes of Conduct do not issue themto all employees 24

Almost half of all respondents do not make their Codes of Conduct publicly available on request 25

Few groups contribute to the development of Codes of Conduct 26

Consideration of stakeholdersÕ needs

Input to business ethics activities by all stakeholders has increased,however overall activity appears to have levelled off 27


Of all companies which provide training, two in five restrict it to certainemployee groups only 29

Few companies utilise the range of tools available to maximise valuein training 30

Few groups contribute to the development and delivery of business ethics training 31


Page

Reporting/advice channels

Many companies have reporting channels other than line management 32

More needs to be done, and can be done, to encourage reporting of wrongdoing 33


Only one in two participants (55%) reported the use of feedbackgathering methods. The different methods provide different information, yet few companies appear to use more than one method 35

Influences, impacts and challenges

Reputation, corporate governance and increased emphasis on values areperceived to have most influenced the development of business ethics activities 36

Overall, existing business ethics activities are perceived to improve business performance 38

The case for prioritising business ethics appears to be generally, but notuniversally, accepted 39

Those who operate the business, employees and line managers, are perceived to be least aware of business ethics risks 40

Global ethical challenges are a significant priority in a global market place 41

The role of business ethics champion is perceived to reside primarily, but not exclusively, on or close to the board 44

Responses and participant profiles

Survey participants by function 45

Industry profile of participating companies 46

Industry profile of the FTSE 350 46

Global annual turnover of participating companies 47

Number of employees in participating companies 47


Notes


Documents

Large Ethical concerns and Superbrand reputation risk ......2 The study advisory panel 5 3 Managing business ethics – the need and the opportunity 6 4 Executive summary 9 4.1 The