Corporate ethics are under the spotlight following a series of high-profile scandals. How do risk managers guide ethical values?
Whether it’s #metoo and the fight against sexism, outrage at financial misconduct, or the environmental battle against pollution and plastic, ethics play an increasingly important role in modern business. In recent years, global corporates have pushed their environmental, social and governance credentials to win over shareholders and customers. But occasionally, and often very publicly, companies can fall short.
Australia’s Royal Commission into financial services highlighted the true cost of ethical failures. As the country’s big banks were hammered on ethical and conduct failures, the financial sector suffered a loss of customer confidence, a dented brand image, and financial repercussions.
The Royal Commission is set to force Australian corporates to review their ethical standards, with an emphasis on conduct and culture. The Commission revealed more than a decade of unethical behaviour in the Australian banking system, including ‘selling’ products to dead customers, mis-selling home loans, and handing out credit to vulnerable people.
For risk managers across the Asia-Pacific region, ethics has become a more pressing topic.
Risk managers will need to navigate a tricky minefield of intangible risk. Who should set a company’s ethical values? Should risk managers take responsibility for enforcing ethical values across an organisation? And should ethical issues inform risk management decisions?
Kim Pelly, General Manager of Risk and Safety at Queensland Police-Citizens Youth Welfare Association, says the Royal Commission has put ethics at the top of the agenda. “In Australia, we are seeing more emphasis being placed on corporations to conduct themselves in a way which does not fall short of community standards and expectations…The Commissioner was scathing in his report, highlighting that conduct was, in most cases, driven by a desire for profit or gain with limited focus on the long-term risk to the company or industry.”
Hans Læssøe, the founder of risk consultancy Aktus, says modern companies have nowhere to hide: “I believe ethics has become more important for risk and all other managers in recent years. The reason being social media which makes it increasingly difficult to sweep unethical behaviour under the carpet for very long.”
He adds: “Risk managers need to be more alert when companies’ ethics are overwritten by profit and greed and the risk manager is asked to ‘deal with this’. Examples in mind are ENRON, VW, BP, Wells Fargo.”
Franck Baron, Chairman of PARIMA, and Group General Manager Risk Management & Insurance for International SOS, agrees that ethics have become a more important topic for risk management teams in recent years. “There’s a growing expectation of how companies should behave, and the outcome of their activities. Whether it’s an environmental impact, social impact, or how you manage your taxes. Certain companies are very good at optimising their taxes, meaning they are good at not paying what they should. It has an impact.”
How should companies set their ethical values, and who should hold the responsibility for overseeing them? Baron believes senior board-level executives need to take charge of the issue: “Ethics should be part of the mission statement of a corporation. Management should set the tone at the top. You need an alignment at this level to encourage others. What is core to the DNA of the organisation?”
Baron believes ethics should guide corporate behaviour and decision-making. “Ethics is about making sure people behave the way they should, in line with the value of a company. How can we make sure the way we work complies with the nature of the company and what is expected of the organisation?”
Pelly agrees the tone on ethics should be “set from the top”. She adds: “While the boards and executive management in the Royal Commission case studies magnificently failed to uphold their oversight responsibilities, we must be careful to not remove accountability from those that should set the organisational culture within the company.”
Pelly adds: “The board must ask questions of senior management to assure themselves that an appropriate ethical program is in place and it is effective. I do not believe that this is the role of the risk manager.”
Læssøe says ethics should be “within the oversight scope of the board of directors”, “at least to approve the standards”. He adds: “In most cases, the standards should be defined by a “task force” of ethics, communication, legal and HR people. I assume most companies will have mid-level specialists draw up something which is then discussed with, edited and approved by a corporate ethics committee and then the board.”
With board-level executives responsible for setting ethical values and guidelines, what role should risk managers play? Should they leave the topic to senior managers, or take a more hands-on approach?
Baron believes risk management teams should play a “critical” role enforcing ethical standards and assessing ethical risks: “Ethics should be one of the dimensions we look at when we assess risks. If we believe certain behaviours are not in line with the way we want our company to behave, enterprise risk management programs should flag this up.”
Baron adds: “Risk managers should look at the ethics dimension the same way they look at other risks. You may have a risk where the financial consequences aren’t huge, but it may impact the core ethical values of the company. Hence it is critical for risk managers to flag this up.”
Pelly believes risk managers should be responsible “for providing senior management and the board with information on how the company’s current ethical climate or cultural norms and standards might impact on the company achieving its strategic direction”.
She adds: “Consideration must then be given to whether the company’s ethical culture will derail upcoming projects and if so, whether the board should consider a change in the ethical culture to remain strategically viable.”
Læssøe believes ethics should influence all business decisions, and says risk managers should not be left to solely police individual behaviour. “Leaving it to risk management comes to look as ‘if we do this, how can we mitigate the risk of getting caught…The ethical code of conduct is not a risk issue but a value issue,” he adds.
Overall, risk experts believe the public focus on ethics is here to stay. They predict risk managers will continue to play an important role as companies navigate ethics in their internal operations, supply chain, and customer relationships.
“There’s a growing movement to make sure corporates are acting the way they should, and that is a very complex exercise,” said Baron. “Even the yellow vest protests in France have arisen from this feeling, looking the disparity of pay within an organisation. People are looking at ethics as ‘doing the right thing’. The expectation is bigger than ever, and there’s a very rewarding role to be played by risk managers.”