Are business ethics getting worse?

Are business ethics getting worse?

Our business ethics debate opened with the suggestion that on a scale of 0-100, where 100 is the worst; business ethics are closer to 100 than zero. But is the situation getting worse of better? Business ethics had reached its nadir in the mid noughties, it was argued, but was now starting to improve.

Giving the debate an historical context, it was suggested that the role and responsibilities of companies have changed.

When the Dutch created the company in the 16th century, a business could not be incorporated without a declaration of purpose. Built into this declaration were the company’s obligations to society, creating a reciprocal pact to benefit both. Preserving this declaration of purpose, it was argued, is essential to promoting good business ethics.

This model was adopted by the English and was widely used until the early 1900s when the State of Delaware removed the need for a declaration of purpose, in order to attract businesses to incorporate there. Over the next 100 years, this revised model for incorporation fuelled the rapid growth of the market economy, in particular, the emerging dominance of publically held companies.

However, in the 1970s market economies started to stagnate. This, coupled with rising commodity prices, created ‘stagflation’. A view emerged, erroneously it was suggested, that growth could only be rekindled by a new focus on deregulation, privatisation and a reduction in the role of the State.

In effect, this reduced the State’s willingness and ability to intervene and regulate business behaviour, leading, it was said, to a significant decline in business ethics. Business focus shifted to a new paradigm of shareholder maximisation, creating a culture that permitted anything if it turned a profit: the ‘decline of shame’ as the speaker called it. In the banking sector, we saw balance sheets grow to a level of extreme risk, well beyond the size of global GDP, which ultimately led to an unmanageable collapse in the system.

Globalisation also had an impact on corporate behaviour, with companies increasingly operating in countries that do not share the same value systems.

Perhaps as a response to these factors, by the start of the millennium, Corporate Social Responsibility (CSR) was starting to work its way onto the corporate agenda. At that time, the CSR focus was on community projects and after-work volunteering. Companies produced glossy brochures of CSR activities to show how ‘good’ they were.

A little over a decade and a global market collapse later, CSR has changed and is now embracing business ethics and corporate behaviour. It was said that CSR has become an urgent ‘must have’ and is now considered by many companies as an essential part of their licence to operate, vital to restoring consumer trust.

So why is this? Much has been spoken about the trust deficit and the need for businesses to address it. There is some evidence that businesses are starting to recognise that they have lost their sense of purpose. Some shareholders are seeking advice on the best ways to hold companies to account and demand more responsibility.

So are business ethics now starting to improve? The room was divided almost equally into those who felt that ethics were the same as they had always been and those that felt there were signs of improvement, with no one agreeing with the proposition that they had got worse.

No Change

Those who argued that business ethics have not really changed expressed the view that the mis-selling and accountancy scandals that we see today are the same as those of the 1990s and early 2000s.

Human nature, it was suggested, is the underlying driver of ethics and behaviour. As businesses are made up of a collection of individuals we cannot therefore be surprised that behaviour remains unchanged

 “Fundamentally, most of us know what good looks like, but there will always be saints and sinners.”

It was also suggested that although changes in regulation and increased scrutiny mean that malpractice is likely to be exposed, until there are changes in personal accountability, it will make little difference overall to corporate conduct. As long as fines are built into business costs as part of anticipated expenditure, there is little real incentive to change behaviour.

In addition, company reward structures often incentivise staff to sell – this in itself can lead employees to make ethical compromises and errors of judgement for personal reward.  Such structures may also need to be revised if we really want to see an improvement in business conduct.

Signs of Improvement

Those arguing that business ethics are getting better pointed to a need for a longer-term perspective. Looking back over the last 100 years, there have been huge improvements in areas such as health & safety, labour laws, discrimination and equality. Those who felt that there has been some improvement argued that business ethics has definitely risen up the corporate agenda. Investors are asking more demanding questions and businesses can no longer avoid having an answer.

Some global companies are also noticing a changing approach, even in challenging market places, as countries recognise the need to adapt in order to attract and keep western businesses.

Three key factors were identified as drivers of change: public scrutiny & transparency, economic climate and legislation.

Public Scrutiny and Transparency

Public opinion on the way business should be conducted is changing rapidly, largely due to repeated revelations of corporate malpractice and what are perceived to be abuses of power and position. According to the Edelman Trust Barometer, trust in the CEO reached an all-time low of just over 30 per cent.

The growth of social media and the internet has put business under the spotlight. Opinions on business in general or companies specifically can be instantly shared to a potentially global audience, making it far easier to expose bad behaviour than was previously the case.

Good companies are increasingly aware of the need to embed ethical practices in order to protect reputation.  To be really effective, this has to be far more than a PR exercise and go right to the heart of an organisation and how it conducts its business.

Economic Climate

The prolonged economic downturn is also increasing the amount of time that businesses are spending under the spotlight. Austerity focuses attention on money. While the public is told to tighten its belt, repeated stories of excessive remuneration and tax avoidance ensures the continued scrutiny of business ethics. While this is clearly damaging to business reputation, some argued that this could also be an imperative for change.

Legislation/Regulation

It was noted from the speaker’s remarks that while the period of deregulation in the 80s and 90s was designed to stimulate growth, in hindsight, this laissez-faire period had, in fact, led to a decline in business ethics (the decline of shame). The crash of 2008 has now led to a renewed focus on what is needed to regulate behaviour.

It was felt that unethical business behaviour had reached its low point and that legislation such as the Bribery Act is starting to drive change and create an environment that forces businesses to put common purpose and ethical conduct back on the agenda.

The Stewardship Code was also felt to be having an impact. Investors are increasingly keen to work with businesses that have signed up to the Code. However, some felt that as the guardians of people’s savings, investors could be doing even more to drive change. They have the power to put purpose and values back onto the corporate agenda.

Compliance is also playing its part but must move away from the tick-box, bend the rules approach to one that embraces the spirit rather than the letter of the law.

Even those who felt that business ethics have stayed the same welcomed regulation, as it increases the likelihood of those behaving badly getting caught. However, bigger fines were called for, as the penalty for bad behaviour should have a significant rather than a nominal impact.

Conclusion

Bad business behaviour, it was suggested, is like diving in the Premier League. It has got worse since the 1970s, damages the organisations that fail to stop it and is not what the public wants to see.

The good news, however, is that business ethics has passed its nadir and is now on an upwards trajectory. Values and ethics are increasingly being built into the weft and warp of organisations, but need regular checks and balances to ensure they are properly embedded and supported by an adequate regulatory environment.

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GoodCorporation Business Ethics Debate: May 2013