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Drawing the line

22 October 2017

No board would admit to being unethical

At a reception in London’s Royal Academy hosted by Board Intelligence, guests were asked what they would add to a board’s agenda to make for a better run business. There was a mention of ethics – the suggestion was that the board should consciously check whether the way it makes money is compatible with its ethical principles.

The event came in the week that Lloyds Bank was fined and publicly rebuked by the Governor of the Bank of England. It emerged that the bank systematically rigged an interest rate benchmark used to calculate how much it should pay on emergence funds provided by the taxpayer to enable it stay solvent.

No board or board members individually would admit to being unethical, yet the businesses they preside over sometimes do unethical things. A survey of business leaders a few years ago found a depressing number thought it would be okay to pollute if it made a big difference to corporate profitability. If that pollution could be out of sight – either underground or in a far country
– so much the better.

Boards will say that the choice is rarely black and white and the challenge is choosing between various shades of grey. There is often no conscious decision at all but rather the business drifts from its whiter than white starting place towards something darker without anyone really noticing.
You might argue that this is the position the banks found themselves in with payment protection insurance.

It makes sense in these uncertain times for someone with a mortgage to cover themselves against the risk of a sudden loss of income resulting from unemployment or illness, so that they can keep up the payments and not lose their home. Yet what started as a good product for some customers was turned into an exploitative scam to make money out of all of them.

It is not just the banks. Any trip to a supermarket confirms how commonplace it is for businesses which want to make a bit more money to put prices up in ways the customer might not notice – by changing the size of a chocolate bar, putting a fraction less in a packet or using inferior ingredients. Less visible, but equally dubious, the supermarket might exploit its suppliers – small businesses which have not got the strength to stand up to it – and unilaterally cut the prices it agreed earlier to pay them. In all these cases there is a line where the acceptable becomes unacceptable, but where is it exactly?

The big question is whether things would be different if the boards knew what was going on. It is hard to imagine a public company board making a conscious decision to make money by treating their customers unfairly or by exposing its employees to unnecessary danger. However, how many boards avoid asking the question because they would not like the answer?

Back in July, Peter Montagnon of the Institute of Business Ethics published a paper which aims to tackle these issues. It suggests the board begin with its starting values – typically a good product, produced in good working conditions and sold at a fair price, with fair treatment of all stakeholders. These values should be tested against the business model so that the directors really understand how the company makes its money – not in some abstract way, but in detail. Had bank boards behaved in this way, they would have learned that they were not making money by giving loans to small businesses but by selling them swaps they did not need, and they would have had to do something about it.

Companies need public trust if they are to have a long-term future. They are not going to retain that trust unless they can convince their voters that ethics are embedded in the business and govern everything it does. Montagnon’s paper suggests to boards what they might do to create and maintain sound business values and an ethical corporate culture. Something this fundamental must come from the board because this is not about compliance or empty mission statements – it is the heart of a business.

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ICSA: The Governance Institute
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