It was 10 years ago this February that the UK’s oldest bank, Barings, went bankrupt.
In what is seen as the quintessential tale of financial risk management gone wrong, an institution old enough to have financed the Napoleonic war collapsed after a string of bad deals by trader Nick Leeson left an £800m hole in the company’s finances.
More recently, corporate scandals involving Worldcom – where chief executive Bernie Ebbers could face an 85-year jail sentence – Enron and AOL/Time Warner, have put business news on the front pages for all the wrong reasons. Even last month, the legal chief at the Association of British Travel Agents (ABTA) was sentenced to four-and-a-half years in prison after embezzling more than £1m.
It seems that fraud, false accounting and dodgy dealings are just as much a part of the business world as the suit, briefcase and patent leather brogues.
However, reforms have been introduced to stop the rot and restore confidence. The Financial Services Authority recently tightened codes of practice on corporate governance, while new regulations now make directors legally responsible for reporting on intangible assets.
But, according to Roger Steare, an occupational philosopher who specialises in corporate ethics, if companies are serious about rooting out foul play among their employees, they must go further than simply complying with a few new rules.
“People confuse justice and integrity,” he says. “Justice is about conforming to laws and regulation, whereas integrity is about doing the right thing when faced with a certain situation.”
Steare worked as a headhunter in the City before deciding he no longer wanted to work in an environment where “people hang their values up along with their coats”. He now runs workshops aimed at helping workers weigh up the pros and cons of tricky business dilemmas and to develop ethical principles for the workplace.
The lack of ethical guidance currently given to UK employees was highlighted in a recent survey from the Institute of Business Ethics. It found that more than half of the 91 FTSE 100 companies that publish codes of conduct for their staff provide no training on how to apply them – even though 60% require employees to obey the codes as part of their contracts.
“It’s like giving someone the keys to a car without making them learn the Highway Code,” says Steare. “Is it any surprise there are pile-ups in the moral maze of business?”
One company that has introduced ethics training is investment bank Dresdner Kleinwort Wasserstein (DKW). According to Andrew Pullman, head of HR for DKW’s capital markets business, a two-hour course, piloted last year for senior management in the equities division, has proved so popular, it is now being rolled out to all directors across the UK capital markets division.
“We have responsibilities to our clients to adhere to regulations and codes of conduct governing the capital markets,” says Pullman. “But sometimes there can be different interpretations of these rules, perhaps in new or unusual situations, which require a judgement call from our bankers. There can also be grey areas when theory and rules don’t tell you how to act. This is where ethics can come into play.”
On the course, participants discuss case studies and brainstorm scenarios.
“Corporate ethics is much more than a core value on a mission statement,” adds Pullman. “It’s about creating a culture where people know ethical standards are important.”
It’s also about preventing damage to the bottom line, according to Kevin Money, director of corporate reputation at Henley Management College. Companies with a bad reputation are most likely to incur fines and litigation and are less likely to retain valuable employees and customers. “Operating in an unethical way is unsustainable in the long-term,” he says.
But to truly instil a moral philosophy into an organisation, ethics assessments must occur on a regular basis, says Ali Gill, a director at talent management consultancy Getfeedback.
While many companies profile personality at interview, few continue this assessment throughout a career. “It should be a consistent theme of an employee’s development,” she says. “Managers should get into the habit of asking why certain decisions are made and run through the alternatives.”
If employees are more aware of their potential weaknesses and companies are more aware of these potential pitfalls, she says, it allows the organisation to mitigate against risky behaviour.
Some job types, according to Gill, demonstrate general traits. Traders, for instance, are prone to taking risks, while sales people are occasionally liable to bend the truth. “HR can have a direct input into compiling risk reports for their organisations,” she says.
At Prudential Financial, a company responsible for investing £150bn of consumer savings and pension contributions, chief executive Mark Wood points to a number of initiatives put in place to ensure ethical behaviour. Senior managers are encouraged to meet with staff and customers on a regular basis to deal with any concerns, while a whistleblower hotline is available for employees to report any unethical behaviour.
“We can’t afford to get involved in dodgy tax deals or invest in a flaky company,” says Wood. “Trust is at the core of our brand.”
The company also has a ‘squeaky clean index’, which uses metrics such as the number of customer complaints, turnover of staff and new products that contravene regulations to calculate employee bonuses. By attaching good behaviour to staff incentives, the business is showing its ethical credentials, says Wood. “And it also makes pure good business sense,” he says.
But, despite all these honourable intentions, isn’t unethical behaviour inevitable in the cut and thrust of today’s business world? Isn’t a Gordon Gecko-type character (from the film Wall Street) bound to raise their ugly head from time to time?
Steare agrees, but argues that business must strive to put its own house in order. “After all, what’s the alternative?” he asks, quoting the philosopher Edmund Burke: “All it takes for evil to flourish is for good men to do nothing.”
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Try these four ethical dilemmas from talent management consultant Ali Gill
A highly-regarded ‘superstar’ senior executive is up for promotion. However, there are genuine concerns about her ‘robust’ management style which, although it gets results, alienates a large percentage of her colleagues.
While she has not yet been party to any employee relations proceedings, there are many signs of negative, perhaps abusive, behaviour. Her division’s performance is critical to meeting investor expectations and there is strong pressure from some on the executive board to confirm her promotion or risk her resignation.
How would you advise the board?
You are responsible for recruiting a new sales director, following the previous director’s resignation over what he considered to be questionable business decisions by the board.
You are aware that many in the organisation share these concerns. But this is a crucial role, and your chief executive insists the company’s values of ‘integrity, respect and trust’ are included in the advert to attract good-quality candidates. Do you consider this to be ‘vacancy fraud’?
What would you do about it if you did?
Cash is tight and the finance director is delaying payment on debtor invoicing by 30 days beyond the agreed terms. Do you consider this behaviour acceptable, unethical or even unlawful? What would you do about it, if anything?
Your colleague comes back from a client lunch and tells you that the restaurant undercharged him for the meal to the tune of 50. He seems really pleased as expenses are under scrutiny at the moment. Do you congratulate him, or do you point out that his actions amount to theft?
What are the reasons for your answer?
Send your answers to firstname.lastname@example.org
A scandalous history
1690-98: City ‘jobbers’ sell bogus company shares in City coffee shops.
1720: South Sea Company collapses after selling trading rights it did not own. Parliament passes the Bubble Act banning all companies “presuming to be a corporate body”.
1930s: Corporate greed and mismanagement viewed by many as the cause of the Great Depression. US Supreme Court judgment states that corporations are “Frankenstein’s monsters”.
1973: First oil crisis leads to the development of laissez-faire economics. The election of Margaret Thatcher in 1979 and Ronald Reagan in 1980 results in wholesale deregulation and privatisation.
1991: Bank of Credit and Commerce International closes as money-laundering and fraud end in a £10bn loss.
1991-92: Maxwell scandal costs 20,000 pensioners £400m in pension fund losses.
1995: Nick Leeson’s trading losses of £800m cause the collapse of Barings Bank.
2000-02: Dotcom and energy bubbles burst as Enron and WorldCom file for bankruptcy. Numerous banks, accounting firms and lawyers face criminal, regulatory and civil litigation.
2003: AOL/Time Warner writes down 2002 earnings by $98.7bn. Investors now pursuing civil litigation.
2004: Parmalat discloses ‘black hole’ of 10bn euros in its accounts. Several international banks under investigation.