Ethical conduct was firmly in the spotlight for much of 2018 for a variety of reasons, from the #MeToo movement which pushed bullying and harassment onto board agendas, through to the implementation of GDPR which turned us all into data privacy experts.
Despite the many geopolitical challenges around the world and the forecasts predicting a slowdown in global economic growth, the impetus for businesses to be run ethically will continue in 2019. Corporate misconduct damages more than reputation. Shares in companies such as VW, Tesco and Rolls-Royce are still around 30 per cent below their pre-crisis peaks against the FTSE index which was up by 15 per cent over the 2014-18 period.
As the Financial Reporting Council stated in its consultation on the UK Corporate Governance Code, poor ethical conduct is a business risk in itself.
So, what are the likely ethical topics for 2019?
The reporting period for the new UK Corporate Governance Code began on January 1, so although businesses won’t be obliged to report on culture and values until 2020, listed companies need to start thinking about how they plan to measure and report on this during 2019.
ESG is finally becoming mainstream. 2018 saw a significant rise in the prominence of ESG investing which now influences over $20 trillion in assets under management. Research shows that stocks of sustainable companies significantly outperform their less sustainable counterparts. Investors are therefore looking for information that demonstrates a company’s environmental, social and governance record and performance.
Gathering such evidence has never been easier. This is already being done by ESG investment teams who draw their own conclusions from the public information they obtain. What many businesses are starting to realise is that an even greater advantage can be obtained by measuring and managing their own social, environmental and governance impacts with a view to providing meaningful information to the investment community, who are increasingly interested in evidence of long-term sustainability. As the links to better financial performance are starting to become clear, we expect to see a rising interest from the corporate side on how to benefit from ESG investment.
Data Protection moved from the back of the IT cupboard to the top of the board agenda during 2018 as businesses sought to ensure they treated personal information appropriately and were properly protected from data breaches. Google’s €50 million fine by the French data protection authorities shows that the new legislation has teeth.
The deadline for GDPR compliance has now long gone, but for many companies, data privacy is still pigeon-holed as an IT or legal problem and not an issue about individuals and their rights to manage their own data and be private if they want. As Elizabeth Denham, the UK Information Commissioner said, “Ethics is at the root of privacy and is the future of data protection”. We are likely to see more fines and more reputational damage throughout 2019.
Human Rights legislation has strengthened around the world, most recently in Australia which passed a Modern Slavery Act in 2018 that came into effect on January 1.
While in the UK, the effectiveness of the Modern Slavery Act is under review with a report due to come before the Home Secretary by the end of March.
In France, businesses are already being asked to identify, analyse and rank their human rights risks, demonstrating a process for continuous assessment and a monitoring scheme to follow up on measures being implemented.
All this amounts to the beginnings of genuine pressure on businesses to demonstrate more effectively that they are putting steps in place to assess, mitigate and measure the impact of their activities on human rights. This will continue to grow as the year progresses with those at the vanguard in a strong position to use their endeavours to strengthen reputation. While human rights risks remain highest where corporates are working in war-torn, poor and unstable states, the migration crisis in North America and Western Europe will also present increasing human rights challenges in our home markets.
Economic Crime continued to hit the headlines globally last year and more scandals will almost certainly emerge during 2019. The UK Government has announced a task force to tackle economic crime and some are anticipating the first use of the corporate failure to prevent the facilitation of tax evasion offence, enacted by the Criminal Finance Act. No-one would be surprised if we have another mega leak of data from an offshore jurisdiction and there is a marked change in tone amongst key corporate leaders who are starting to challenge the widespread use of these locations for tax avoidance. However, the Criminal Finance Act has not yet had the impact that we were expecting, with fewer firms than anticipated documenting and promoting their ‘reasonable procedures’ to prevent the facilitation of tax evasion. We expect to see more corporate activity on the prevention of economic crime in 2019.
Regulators are undoubtedly strengthening their armour in a number of areas. For businesses the worst response is turn a blind eye and hope that nothing goes wrong. Relying on a boiler plate compliance programme is not much better. Good corporations start with a values-based ethical response: are we doing the right thing and how do we know? Corporate leaders need to set the right tone and back it up with actions.