business ethics - internal audit's opportunity to influence organisational change
DESCRIPTION
This presentation to the IIA Melbourne speaks to the changing business environment, the strategic reputation risk posed by social media the importance of ethical leadership in creating a highly performing organisation. It also highlights the role Internal Audit can play in influencing positive change, moving Audit along the value curve.TRANSCRIPT
INTERNAL AUDIT’S OPPORTUNITY
David MallardManaging Values
values.com.au
BUSINESS ETHICS &THE BOTTOM LINE
The Changing Business Environment
• Volatile• Uncertain• Complex• Ambiguous
A 2012 IBM study of over 1,500 CEOs identified their
number one concern in business as ‘Perpetual
Whitewater’ characterised by global markets that are:
Where everything and everyone is interconnected
Interconnected
‘Sneeze in London, catch a cold in Melbourne’
Interconnected
The new public square - social media
Interconnected
Where digitisation has empowered consumers,
employees and grassroots activists to take immediate direct
action
InterconnectedIn the online world
everything you do privately and/or within your
organisation can find its way into the public domain
Connectivity Increases Vulnerability
• The internet means more people now see how you do things, how you impact on others and can tell others how you should be held accountable
• Stakeholder internet retaliation - anytime for little or no cost and without restraint
Risk Profile?
Strategic Risk
Reputation Risk
Exploring Strategic Risk - December 2013
Linking ethical behaviour to reputation makes ethics integral to what drives
business success e.g. Starbucks & Google tax minimisation fallout
‘Reputation risk is now the biggest risk concern, duein large measure to the rise of social media, whichenables instantaneous global communications that
make it harder for companies to control how they areperceived in the marketplace’.
Strategic Risk
Business Ethics vs. Individual Morality
takes the lead in deciding what is unethical and has defined ethical business as:
Who decides what’s ethical ?
Corporate Social Responsibility & Sustainability Do systems and behaviours support stated values? Do people understand the difference between personal & organisational
values & when one takes priority over the other? Does your business Ethical Code & its values guide decision-making at work?
Decisions made have a direct impact on the 2primary sources of organisational capital
Social capital Financial Capital
• IBM’s CEO research highlights a trend to greater organisational transparency & accountability i.e. values rather than rules
• Many leaders invest in ethics management systems to protect their people
Business Ethics Context
• Business ethics is a management accountability in US, UK & Europe
• Ethical risks are known & regulators demand more than a paper trail
• Australia is out of step - business ethics is often seen as a ‘discretionary endeavour’
Business ethics dynamics
• Employees consistently report they are working in environments conducive to misconduct
• Fall out from GFC led many boards to concentrate on compliance and paper trails at the expense of managing culture
• However, compliance inhibits a holistic view of how risk issues emerge
• Ethical skill development promotes managerial & personal accountability
Do ethical failures matter?
• 2013 Leighton Holdings allegations• 2012 UBS fined $29.7m for system failures• 2012 HSBC paid $1.92billion to settle charges of money
laundering• 2012 Barclay’s fined £290m manipulating key interest rates• 2010 BAE Systems pays £400m settle bribery charges• 2010 Rio Tinto employees jailed for bribery in China • 2010 Daimler paid $185m fines bribing foreign government
officials• 2008 Siemens paid $1.6billion to settle global corruption case
Discipline of business ethics
• Focus on the institutional & contextual dynamics that shape employee behaviour
• Demands that leaders move beyond ‘tone’ setting to aim higher - beyond legal minimums
• To design institutional practices that encourage & reward ethical behaviour
• To establish robust ladders of escalation
A strong positive relationship between business performance and corporate integrity
Investing in an Ethical Culture
The Hay Groups WoMAC’s were found to have outperformed average shareholder growth by
about a quarter to two-fifths above normal returns
Corporate Executive Board research shows that integrity leaders incur only one-eighth the costs of misconduct than competitors, and have 12% lower labour costs because their
employees invest more discretionary effort, with shareholder returns 6% higher than the
average company
Investing in an Ethical Culture
2011 Australian research of 78 organisations found companies
that focused on culture as well as financial performance indicators
were 3 times more profitable
Investing in an Ethical Culture
Ethical Culture
Profi
tabi
lity
The research also highlights that organisations with systems and processes to enable risk and compliance information flows
but that do not have leaders with the right ethical qualities, will still struggle.
The following 4 attributes are statistically proven to both foster a healthy culture and reduce the likelihood of ethical misconduct:
1. A sense of organisational justice2. Honesty and integrity in relationships3. Respect and trust for employees4. Listening carefully to the opinions of others
How does your organisation track on these?
Investing in an Ethical Culture
Demonstrate ethical leadership e.g. remuneration that rewards sustainable practices & culture builders, not just revenue, sales etc
It is the regular measurement and management of culture that differentiates high-performing organisations from their peers
Actively measure your leaders - objective and subjective
Educate employees and deliver organisational justice by responding quickly and consistently to unethical practices
Leading businesses in Asia are increasingly investing in ethical culture development to mitigate against local practices
Investing in an Ethical Culture
Internal Audit’s Role in Building anEthical Culture
• Leverage Internal Audit’s unique organisational position to influence the ethic’s conversation: CEO, CRO, Board members
• The ethics whitepaper is one reference point to commence
• Effective management of business ethics risk requires an organisational strategy that is in tune with wider societal values and the public’s growing expectations of business.
• Business Ethics is about risk management effectiveness - its directly in Audit’s sweet spot
• Include an Ethical Risk benchmark review in your Audit coverage – compare your organisation to better practice - sell recommendations in the context of mitigating risk and improving the bottom line. Promote Audit along the value curve
Successful businesses of the
future will:
• Build organisational integrity as an enabler of business profitability and success
• Embrace ethics and transparency as way of flattening hierarchies & engaging employees
• Step up to meet employee desire to be part of a business that seeks to enhance society as well as deliver bottom line results
• Leverage Internal Audit’s unique position for influencing change
Detailed research found in White Paper written by
Managing Values for the Institute of Chartered
Accountants.
White Paper
