Two decades on – is business ethics changing corporate behaviour?

Have we really made any progress over the past two decades to improve corporate behaviour? Speaking at GoodCorporation’s 21st anniversary celebration at the House of Lords, Leo Martin was asked to reflect on what had happened over the last two decades, to consider whether business ethics is changing corporate behaviour and how it looks set to evolve.

Leo reflected on the continuous flow of corporate scandals that seem similar in content to 2000, when GoodCorporation launched. This is despite the genuine concerns at the time of GoodCorporation’s launch about poor corporate behaviour and its impact on individual companies, their reputation, financial performance and the impact on stakeholders and the environment.

The business case for ethical and responsible business behaviour

GoodCorporation asserted from the outset that there is an obvious business case for ethical and responsible business behaviour. This comes from the clear virtuous circle effect which results in well-treated customers recommending to others, happy employees staying committed and loyal for the long-term and the ability for the management team to focus on strategy and business development rather than cleaning up after a scandal and so on.

So if the business case is obvious, why have scandals continued to occur? GoodCorporation identified that the key gap was the lack of any measurement system of these aspects of non-financial performance that would allow investors and other stakeholders to identify and differentiate good companies from bad.

From the outset, GoodCorporation sought to provide a robust approach to measuring and evaluating responsible management and conduct, believing that businesses would soon be judged, not just on their financial performance, but also on their ability to provide credible measurement of responsible business practices across all areas of operations.

Establishing frameworks to measure responsible behaviour

Since GoodCorporation began this journey, a cottage industry has emerged, seeking to provide ways of evidencing good corporate behaviour. Initially, much of this fell under the umbrella of corporate social responsibility (CSR), with glossy reports of good corporate deeds. However, the content of these reports lacked the accounting language and the methodology needed to serve as meaningful accounts of responsible business performance. While the reports often covered (and continue to cover) the right topics, they lacked any helpful measurement that would differentiate them from other companies. Where measurement was used, for example on the number of women in the workforce, the data lacked any comparison with peer companies or any other contextual metrics to help the reader to understand whether the performance was good or bad. These reports may have helped with PR efforts, but did little to provide assurances that responsible, ethical and sustainable business practices were firmly in place.

With the GoodCorporation Standard, launched in 2001, GoodCorporation devised a methodology for measuring and monitoring responsible business behaviour. Our work helps companies to put their code of conduct and other associated policies to the test and determine what is working effectively on the ground and where improvements can be made. Assessment against our frameworks can provide measurement metrics, for use in non-financial reporting. We also use our assessments to risk assess, build roadmaps for improvement and crucially, we provide benchmark data to assess performance against peers.

Over the last two decades, we have developed frameworks and evaluation techniques to help organisations assess a range of business ethics issues, including areas such as corruption prevention, human rights, worker welfare, data protection and bullying and harassment. During this time, these areas have become increasingly important, recognised as issues that can make or break reputations.

Rise in ESG places renewed emphasis on the measurement of responsible behaviour

One of the key changes, over the last decade, has been the interest shown from investors in grappling with non-financial performance and making it a central aspect of investment decisions. This rise in environmental, social and governance (ESG) investing has been a game-changer. However the measurement issue is now becoming urgent. Corporates are confused by the myriad of ESG investors and their different requests for information, while investors are confused, trying to work out which metrics are meaningful and actually link to responsible corporate behaviour. Most of the ESG focus to date has, in reality, been on one topic (decarbonisation) and the switch to a low carbon economy. However, the clear direction of travel is that investors can also see that the responsible corporate management of non-financial risks, integrity and good governance can produce long term sustainability and performance that protects capital. As such, they are now actively looking for meaningful indicators that will enable them to differentiate good companies from bad.

Increased focus from society and regulators

At the same time, we have seen a real shift in what society will accept and tolerate from business. Over the last two decades there has been a wave of hard and soft legislation which is changing business behaviour. Laws on topics as diverse as data privacy, modern slavery, corruption, gender pay gaps, pollution, use of plastics, food labelling and sugar indicate that society expects better of business.

This legislative push looks set to increase. The EU non-financial directive is already in place, requiring companies of a certain size to disclose relevant information on policies, risks and outcomes as regards environmental, social and employee related matters. Building on that is the EU taxonomy which translates the EU’s environmental objectives into a clear framework for investment purposes. Across the G20, the Task Force on Climate Related Financial Disclosures aims to provide a framework for the type of information that companies should disclose to support investors, lenders and underwriters in their assessment of risks related to climate change.

The last two decades have also seen an increasing struggle between liberal democracies and autocratic states. The development of responsible business behaviour is central to this struggle. Liberal democracies need a well functioning market that is perceived to be fair and responsible, generating good outcomes for people and planet. This cannot be achieved by heavy-handed legislation and it cannot be achieved by a few well-minded philanthropic business leaders. Instead it is a society-wide effort to combine the best of free enterprise with an enabling legislative environment, supported by clear measurement of responsible business behaviour that allows investors to select good from bad.

Despite the recent deglobalisation trend, many companies already find themselves affected by this struggle, with a complex role to play in upholding good business behaviour in emerging markets and autocratic countries. For example, respecting human rights can be fraught with difficulty when faced with an undemocratic country that does not protect rights in local laws. This may mean making hard decisions about working in certain markets and calling out bad behaviour, both inside and outside the company’s own operations.

The future of ESG and ethics

The combination of increased legislative pressure, investor focus on demonstrable sustainability, combined with greater efforts from business to embed responsible behaviour means that we are approaching an inflection point. As such, we are likely to see an increased focus on other areas of responsible business practice what will enable investors to differentiate good from bad. In particular, we expect further aspects of environmental performance together with human rights to be the next items on the agenda.

We can also see the growing pressure on business, in an increasingly challenging world that may give rise to the temptation to abandon measurement where it falls ‘in the too difficult box’. Even apparently simple topics like gender equality can be fraught with difficulty in practice, driven by significant differences between sectors, national laws (for example supporting mothers during pregnancy and child birth) and cultural attitudes.

This presents a risk for businesses about how to measure and report on these topics. Companies are understandably nervous about making claims that can’t be justified. We are also seeing tensions emerging within organisations between investor teams at risk of making claims to investors that may be hard to deliver in practice. This gap between rhetoric and reality is a real risk for business that needs to be carefully managed.

Many of GoodCorporation’s clients have been with us at the forefront of these changes, seeking to adopt best practice and build their businesses on a foundation of transparency, integrity and respect. Motivated people matter for change, and we look forward to the next 20 years, working with clients and colleagues to develop further best practice and innovative tools to help build profitable businesses that work for people and the planet.