It shouldn’t be necessary to rely on disaffected employees acting as whistle-blowers to uncover immoral practices in business ethics; regular stakeholder surveys will inform boards who are willing to listen.
The question has to be asked: how many boards of large organisations are properly aware of the ethical performance of the businesses over which they preside? There is a long list of industries currently in the news for failings in this respect, which includes financial services, pharmaceuticals, food, mining, technology and defence.
Almost all the major Western banks have been fined very large sums for ethically wrong behaviour including selling unsuitable products to customers, allowing money-laundering on a large scale and rigging interest rates and foreign exchange rates. Pharmaceutical giant GlaxoSmithKline has been accused of corrupt practices in distributing its products in China. Yum Brands (owner of KFC) has been accused of using suppliers in China which have unsatisfactory hygiene standards. Bumi, the Indonesian coal mining business now called Asia Resource Minerals, notoriously wrong-footed Nat Rothschild who thought he could impose western standards of behaviour on his other directors from the Bakrie Group. Foxconn, a Taiwanese technology company employing over a million people in China was hit by a spate of suicides and has been accused of unsatisfactory labour practices. In the defence sector, BAe Systems admitted guilt regarding corruption allegations but investigations continued afterwards.
In some high-profile cases (and probably very many more unknown to the public) a whistleblower has tried to alert the board to ethical malpractice. Well-known examples are Enron, where Sherron Watkins, a senior finance executive, tried unsuccessfully to get Ken Lay, the CEO, to address her concerns about the irregular nature of the financial engineering which ultimately caused its collapse; Olympus, where the newly appointed CEO, Michael Woodford, discovered that major losses had apparently been concealed from shareholders and confronted the board, only to be fired – Olympus is currently being sued for $273million; and recently GlaxoSmithKline, where an anonymous whistle-blower reported corrupt sales practices – the subsequent investigation by the board blew up in their faces when the investigator was arrested and GlaxoSmithKline was itself accused of corrupt practices by the authorities. Whistleblowers are currently quite widely protected by legislation, but such people usually require a lot of courage as it is invariably career-damaging and in some cases fatal.
In many cases, there is a general knowledge in the marketplace in which an industry operates about the actual or likely ethical behaviour of the major players. For instance in the notorious case of Bernie Madoff, whose investment securities business turned out to be a Ponzi scheme with a deficiency of client funds amounting to $65billion, there were numbers of financial advisers who wouldn’t touch him because his operating performance was seen as “too good to be true”.
Another example is Eurasian Natural Resources Corporation, which was listed on the London Stock Exchange in 2007, a mining group put together by three wealthy businessmen from Kazakhstan and taken private six years later. The comment from one of its major shareholders was that ENRC was a company that should never have been listed in the first place – the company’s overall corporate governance and small free float should have set off alarm bells.
So why didn’t the investors listen to the word in the marketplace? Did greed or personal incentives cause them to turn a deaf ear? And what about the boards whose whistleblowers alerted them to major malpractices? At Enron it seems that Ken Lay was becoming increasingly divorced from reality as the company he created was becoming a house of cards that would eventually collapse. In the case of Olympus, the board appears to have thought that, like Enron, it could continue to conceal losses indefinitely through the processes it had set up for this purpose and that by firing the person who was inconveniently set on making it public they could restore secrecy and calm.
Clearly a board need to keep its ears and minds open to what may be going on, but there seems to be a widespread difficulty of process here which has led to the above examples. In our view, this demonstrates a need to formalise the gathering of opinion about the organisation’s ethical behaviour. Good Corporate Governance requires that the board keeps its lines open to its major stakeholders and our Golden Rules require both an ethical approach to business and accountability to the stakeholders.
The practical way we have devised is to survey the major stakeholders regularly to gain their views about how the organisation is performing in regard to our Five Golden Rules of Good Corporate Governance. The details of our approach are set out in Volume 6 of our Manual on Good Corporate Governance.
The major stakeholder groups which should be surveyed are:
Focusing here on the business ethics dimension, the board needs to monitor whether the organisation is acting properly in three broad areas:
The part of the Survey dealing with regulatory and constitutional compliance will be constructed by reference to the major elements of the relevant regulations and legal constitution of the organisation. Regarding the moral dimension of the ethical performance, the Survey should address the question: does the company behave responsibly towards all its stakeholders? This covers issues such as:
Regular monitoring by the company board of the results of this Survey will achieve two important results:
Thus we can put in place a virtuous loop involving talking to stakeholders about ethics, improving communication and demonstrating proper accountability through transparency. In the process the organisation can show its good corporate governance through communicating that good business ethics permeate the company from top to bottom.
How much better than having a whistleblower bring these matters to the attention of the board – and the public!